“New gap-filling insurance products are made possible by the insurance industry bringing IP legal expertise in-house.”
The business world has fundamentally changed, but most business people seem not to have noticed. Intangible assets and investments are increasingly dominating the leading economies. The world’s largest retailer holds no inventory; the world’s largest taxi service owns no cars; and the world’s largest hotel chain has no rooms. Property, plant, and equipment are no longer a company’s most vital assets. Intangible assets are swallowing the collective balance sheets of the strongest and most successful economies throughout the world—and are increasingly dominating investment and growth in such economies.
A New Model
Intangible assets have several unique attributes. After discussing a salient example of one such uniqueness—scalability (the infinitesimally low cost of reproducing intangible assets)—Bill Gates wrote on his personal blog, Gates Notes, in August 2018: “The portion of the world’s economy that doesn’t fit the old model just keeps getting larger.” Gates wrote these words in a blog post about the larger trend of intangible assets overtaking tangible assets, which he titled for apt effect: “Not enough people are paying attention to this economic trend.” The trend Gates is urging readers to recognize—that modern businesses are marching swiftly in the direction of an ever-increasing focus and dependence on intangible assets—is impressively documented and presented in the 2017 economics book that Gates is reviewing in his blog post: Capitalism Without Capital by Jonathan Haskel and Stian Westlake.
Haskel and Westlake explain that it is almost comically unnecessary to wonder how one might prevent someone from walking into a mechanical factory and stealing machinery. The answer is: fences, walls, bolts, locks, alarms, guards, police, centuries of property law, and other such longstanding methods of personal and real property defense. The challenge of determining how best to protect an idea, however, is much more complex. Intellectual property (IP) rights are the foremost method of securing and defending the intangible assets that are driving the majority of investment and economic growth today.
Risk Management Struggles to Catch Up
Because the intangible revolution is only a few decades old, many companies have yet to develop or otherwise obtain robust intellectual capital management capabilities, including effective risk management of their intangible assets. Though virtually no mature businesses would consider operating without the protection of property and casualty insurance, very few companies effectively insure their intangible assets, despite such “assets that cannot be touched” often representing the most critical components of companies’ success and survival. This is partly because traditional IP insurance solutions have generally failed to meet the needs of corporate buyers. Previous intangible asset insurance offerings were difficult to obtain and subject to arduous, extended application processes; overly limited in scope of coverage; and confined to insufficient limits. A new breed of insurance products is now available, offering broad defensive IP coverage appropriate to meet the needs of modern organizations.
Historical business liability insurance policies, such as commercial general liability (CGL) policies, provide only a narrow sliver of IP protection. Companies seeking to collect under such policies are generally subjected to an uphill struggle with only a small—and more likely nonexistent—payout potentially available at the top of the hill. Dedicated IP insurance policies, however, provide a real opportunity for companies to manage and transfer IP-associated risks. There are four types of dedicated IP insurance products: contingency, residual, offensive, and defensive. Specific contingency insurance covers known risks; for example, providing catastrophic loss protection for ongoing IP litigation. Residual value insurance guarantees the valuation of an intangible asset pledged as collateral to secure a loan. Offensive insurance covers the costs of IP enforcement and is essentially litigation finance. Defensive IP insurance can protect a company’s registered IP and products or services from external attack and can backstop a company’s contractual obligations.
The Right Policy is Out There
A robust defensive IP policy will provide all three of the foregoing coverages—including protection from not only defense costs but also damages in the case of an inbound infringement suit or contractual indemnification claim—and will allow a company to customize their coverage by scheduling particular registered IP, products and services, and contractual indemnification obligations. New, best-in-class policies also offer higher limits than were previously available (up to $100 million) at more affordable premiums (between 1% and 3.5% of the policy limit for companies with a typical risk profile), offer the insured entity maximum flexibility to choose their defense counsel and drive their own legal defense, and can be obtained through a streamlined process with a shortened application as compared to previous offerings.
Such new gap-filling products are made possible by the insurance industry bringing IP legal expertise in-house—such as managing general underwriters hiring IP litigators to become dedicated IP insurance underwriters. Such investments in salient expertise enable the effective evaluation of IP risks necessary to allow underwriters to offer meaningful but affordable protection for applicants displaying typical risk profiles. Due to the newness of commercially viable dedicated IP insurance and the significant IP coverage gaps endemic to general commercial insurance programs, interested companies should engage an insurance broker who is familiar with the IP insurance market to evaluate and pursue IP risk management opportunities. Bill Gates is right that not enough people are paying attention to the rise of the intangible economy, but at least those who are paying attention now have the ability to deploy a robust intangible asset risk management strategy.
Image Source: Deposit Photos
Photo by lightsource