Once largely overlooked, intellectual property is something companies are now recognizing as one of their most valuable assets. This focus on the value of intellectual property has brought about a corresponding increase in litigation over ownership and infringement.

The American Intellectual Property Association reports that the litigation costs for a patent-infringement lawsuit can reach $600,000 where there is less than $1 million at risk. The litigation costs for trademark or copyright infringement aren't quite as steep, but can still reach $250,000 where there is less than $1 million at risk.

With business litigation on the rise in the economic downturn, the potential risks associated with intellectual property are increasing exponentially. If these risks are not insured, a single lawsuit has the potential to create a "bet the company" scenario.

A shield and a sword

Intellectual-property rights create and shield a company's competitive advantage. Consequently, the loss of any intellectual-property rights can destroy a company's market position.

Competitors attempt to gain market advantage by copying competitive products, which may - intentionally or otherwise - infringe the company's intellectual property. The fortunate problem of intellectual property is that a company must enforce its rights against others in order to maintain the value of the intellectual property and its market position.

Conversely, companies are increasingly facing possible intellectual-property-infringement lawsuits from competitors that are, themselves, seeking to create or maintain a competitive advantage.

Increased competition, the increased globalization of the marketplace, the growth of business on the Internet and the continued quest for a competitive edge all contribute to both the value and the risk of intellectual property. Companies must manage these risks. Planning for risk is necessary in any economy, but the ability to manage risk may make all the difference in whether a company can survive a troubled economy. Insurance - the cornerstone of risk management - can provide the needed security for business survival.

Where's the coverage?

Despite the enormous risks associated with intellectual property, many companies are underinsured against the potential claims they face.

Companies often rely on the coverage provided in their commercial general liability (CGL) policy, which contains a section covering "personal and advertising injury." This coverage used to be adequate to cover claims of unfair competition and trademark, copyright and trade-dress claims. As claims increased, however, most insurers modified their CGL policies to specifically exclude many intellectual-property claims. The Insurance Services Organization significantly restricted coverage for "personal and advertising injury" in its 2001 revision to the CGL standard form, and specifically excluded from coverage any advertising injury arising out of the infringement of intellectual-property rights.

CGL policies are not adequate to deal with the varied claims companies face today. Instead, a company will likely need to supplement its coverage with standalone specialty-line policies - the availability of which is unpredictable, as carriers are constantly changing their products and reconsidering which risks they are willing to insure.

Shopping around

Every company will have unique coverage needs, and the types of policies available range greatly among carriers. Common coverage types include:

• Defense-only (also known as defense-cost-reimbursement insurance)

• Defense-and-indemnification insurance

• Abatement-or-enforcement insurance

• Asset-or-collateral-protection insurance

• Business-income or multiperil insurance

• Named-peril insurance

• Cyberspace-liability insurance

• Media-liability insurance

The coverage provided by defense-only and defense-and-indemnification insurance is most like traditional insurance coverage. Defense-only insurance will reimburse legal expenses associated with defending against a claim of infringement (patent, trademark and/or copyright) but will not pay damages, and defense-and-indemnification insurance will also pay for damages or indemnification within the policy limits.

Abatement-or-enforcement insurance is less common. If available, it covers certain litigation expenses associated with enforcing the insured's intellectual-property rights against infringers.

Asset-or-collateral-protection policies insure the value of intellectual property offered as collateral or security for a loan. These policies are also available to insure the value of intellectual property purchased in an asset or stock transaction, and may be used to supplement the seller's escrow. Coverage may extend to legal expenses and damages associated with breached warranties of title, infringement, validity and/or enforceability.

Business-income or multiperil insurance is similar in concept to business-interruption insurance. It insures against the loss of income resulting from the invalidity of a patent or other intellectual-property asset (for example, loss of royalties or licensing fees), and may reimburse the insured for the value of its research and development of the invalidated patent or asset. These policies may also provide coverage for revenue losses resulting from an injunction, which is particularly helpful if the insured is enjoined from selling a product pending litigation.

Named-peril policies are specific to the stated perils. Examples of named perils include copyright infringement, trademark infringement, misappropriation of ideas, breach of implied contract related to creative ideas submitted to the insured, defamation, trade libel, violation of privacy rights and infliction of emotional distress.

Cyberspace- and media-liability insurance policies may include some or all of the perils in named-peril policies arising out of an insured's Internet presence and related losses, as well as other exposures from errors and omissions, third-party business interruption, network security and identity theft, data privacy breaches, regulatory noncompliance, libel, slander, defamation, virus transmission and third-party loss of data, among others.

Assess the risk

Companies should consider the following in assessing risk and determining insurance needs:

• What exposure does the company face? If liability for patent infringement is not a concern, then it may be possible to find adequate coverage through errors-and-omissions, cyberspace and/or media insurance policies. If liability for patent infringement is a concern, however, shopping around is a must. Premiums for patent-infringement policies are high relative to other insurance products, primarily because there is no standard actuarial structure and the market is limited.

• What risk does the company want to cover? First-party coverage is needed to provide property coverage for a company's own intellectual property (for example, abatement coverage), while third-party coverage will provide coverage for claims made against the insured.

• Who will be covered? Will the insured's parent or subsidiary, licensees, distributors, or customers need to be named as additional insureds?

• How far back should the coverage extend? Infringement is often ongoing, and it is not unusual for a plaintiff to assert a claim years after the initial acts of infringement. In these cases, a claims-made policy may exclude the infringement as a prior act. Depending on the coverage desired, the insured may want to pay particular attention to the definition of prior acts in evaluating its insurance options.

• What geographic coverage is necessary? In today's global economy, more companies may need coverage to extend beyond the United States, which not all carriers provide.

• What is the length of time the policy should cover? Although most liability policies are written for one year terms, abatement and asset protection policies may have policy terms of up to three years

If you have never done so, now is the time to pull out and read your CGL policy. If you find that you are too exposed given your business operations, you may want to call your insurance broker and your intellectual-property attorney. By having both at the table, your broker will be able to gain a better appreciation for your intellectual- property risks.

A Buffalo lawyer with a solo practice, Lisa Primerano counsels both corporate lawyers and clients on the protection and enforcement of intellectual-property rights. She can be reached at lisa@lisaprimerano.com.