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Intellectual property: the new cyber

by Ian Lewis, Intellectual Property underwriter on

Widespread publicity about cyber losses set off a scramble for cover in 2017, but intellectual property insurance has yet to come of age. It must: the balance-sheet value of IP assets is at an all-time high, as are costs for resolving IP disputes. Despite this, some estimate that less than 1% of insurable IP assets are believed to be covered, leaving corporations badly exposed.

Complexity is the main cause of the coverage gap, followed by a lack of awareness that starts with customers and extends through the distribution chain. They are linked: unlike the clear vulnerability of physical property, it is challenging to understand how IP could be damaged, or how one might inadvertently damage another company’s intangibles. Meanwhile, regulatory changes continually muddy the waters. 

TMK believes intangible risks such as intellectual property and reputational risk are set to explode, as cyber has done. C-suites need to protect these assets, which can have an enormous balance-sheet value, just as they do their physical assets. Looking ahead, exposure is set to increase further.

Innovation is a breeding ground for IP disputes

Companies’ success is now directly correlated to their ability to produce a steady flow of innovation. The pressure is especially intense in the fast-paced technology, pharmaceutical, and automotive industries, where product convergence is on the increase. Innovation and convergence together create serious IP challenges. The components of any new product are rarely or never entirely novel. End products may be patented, but their building blocks may well be patented by others. In the process of invention, innovators may unwittingly violate another company’s IP. Many are purchasing competitors’ patents – and even entire companies – to avoid infringement.

That, however, may not absolve liability. Connected devices are particularly vulnerable, for example; if a business purchases a phone camera from a third-party vendor, and the supplier is infringing a patent, the phone producer may be held liable. This has led to a rise in contractual indemnity to release the producer from liability. However, most phones combine multiple third-party components. Their combination may violate a patent, and invalidate contractual indemnity. The issues multiply when products reflect the convergence of multiple sectors.

Secondary exposure arises from the storage of IP on third-party vendors’ systems. When acquiring a business, partnering with a business, or using a business’s product, you are adopting the risk profile of that business. Nowhere is that more true than in the world of IP.

Geopolitical changes will make the market more challenging and more complex

Meanwhile, geopolitical changes are making IP protection even more difficult. The US, Japan and Europe are the historic patent epicentres, but the number filed in China has increased massively as innovators there increasingly appreciate the benefits of the system. As they patent their inventions, inter-system disputes are inevitable.

Trump’s pro-patent, protectionist stance for the US presents further uncertainties. His vice-president, Mike Pence, has been a vociferous opponent of Obama’s liberal patent reform proposals. Ironically, the US patent lobby’s pressure for more robust patents could ultimately harm American businesses, leaving them exposed, since more than half of US patents are owned by entities outside the country.

In Europe, the 2018 launch of the Unitary Patent and the Unified Patent Court (UPC) will render a single patent valid in virtually all EU countries, including the UK. It has been designed to reduce fragmentation in the patent system by allowing foreign businesses to obtain pan-European relief, rather than take patent suits to national courts. The harmonisation will be beneficial, reducing the cost of obtaining and maintaining patents. However, the stated goal of reducing the costs of patent litigation will likely only be realised by those experiencing infringement in multiple European countries as the costs of enforcement in the UPC may be higher than one national court.  It is also possible that these new patents and new court system may give rise to an increase in disputes. Bringing infringement suits against an EU entity will be easier than ever, which will prove an opportunity for ‘patent trolls’ that survive solely from patent-system revenues. Their number has been increasing, and is likely to grow even more.

Even a very strong legal team cannot completely negate IP risk. Insurance is not a silver bullet, but it is an essential component of a wider risk management strategy. IP risk will only continue to grow in magnitude as innovation evolves. 

For information about TMK’s Intellectual Property insurance, email marketing@tokiomarinekiln.com

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