What is Patent Infringement Insurance?

19 Apr What is Patent Infringement Insurance?

The purpose of obtaining a patent is to protect the ability to profit from an invention. However, a patent is only useful if you can afford to enforce it in court, as it’s unlikely that sending an angry letter to an infringer will produce the desired response.

Unfortunately, enforcing a patent is extremely expensive. Even for the smallest of disputes, the least you can expect to spend on patent litigation is 200 to 300 thousand dollars. And a surprisingly large number of patent cases result in a patent holder spending more than $2 million when there is less than half that at stake.

This is why it’s advisable for patent holders with products that are generating consider revenue to consider investing in patent infringement insurance, which can cover the cost of enforcing your patent, and/or the costs of defending against infringement claims.

Here’s how patent infringement insurance covers the litigation costs of protecting intellectual property.

The coverage provided by patent infringement insurance is organized into three tiers:

Tier 1 is ‘self-insurance,’ meaning that all court costs up to the figure named in tier 1—typically anywhere between $20,000 and $500,000—are covered by the patent holder. Think works similarly to the deductible you might pay for a medical procedure under your health insurance. The first $X is costs are entirely your responsibility.

Tier 2 is ‘co-insurance,’ which applies to the next $250,000 or so in costs. In tier 2, depending on the policy, the patent holder pays a percentage—between 10% and 20%–of the costs falling within that tier, while the insurance company covers the rest. For instance, if your co-pay is 15% for tier 2, then you’ll pay $0.15 on the dollar for all tier 2 court costs, while the insurance company will pick up the remaining $0.85.

Tier 3 is ‘pure insurance,’ which applies to everything above tier 2. At this point, the insurance company pays 100% of the court costs, up to the policy maximum (usually between $1 million and $3 million).

To get a sense of how this works, let’s say that under your patent infringement policy, the self-insurance figure is $25,000 and co-insurance covers 10% of the next $300,000. Your policy covers up to $1 million, and your litigation costs total $1,150,000:

  • For the first $25,000, you cover $25,000 and your insurance covers $0.
  • For the next $300,000, you cover $30,000 and your insurance covers $270,000.
  • For the remaining $675,000 under the $1 million policy cap, you cover $0 and your insurance covers $675,000.
  • For the remaining $150,000 over the cap, you cover $150,000 and your insurance covers $0.
  • Ultimately, you pay a total of $205,000 in court costs, while your insurance policy covers $945,000.

While the idea of paying $205,000 out of pocket might be a bit stomach-churning, not having to pay the other $945,000 should make it clear just how valuable this insurance coverage can be when it’s time to enforce your patent.

However, patent infringement insurance isn’t cheap. Offensive insurance—for covering the cost of going after an infringer—typically costs around $15,000 to $30,000 per year. Defensive insurance, which covers infringement claims lodged against you, costs about $50,000 to $80,000 per year. Policies that cover both will cost just a bit more than a defensive-only policy.

What if I purchase an offensive patent infringement policy when someone is already infringing my patent?

For the most part, patent infringement insurers take a ‘no pre-existing conditions’ approach to current infringement. If someone is currently infringing on your patent when you sign up for a policy and you don’t know about it, or you’re aware but you don’t disclose it, then the insurance won’t cover it.

If you disclose that someone is infringing on your patent (or that you’re being accused of infringement), it is possible to get the insurer to cover the cost of going after the infringer. However, the self-insurance level in this case will be extremely high—something along the lines of $500,000 on a $1 million policy. You’re going to have to pay a serious deductible before the insurance company gets involved.

This doesn’t mean that it’s always a bad idea to try and cover existing infringement. Patent enforcement isn’t always a court matter. Psychological warfare comes into play. When you’ve got an insurance company on board and you fire off a letter to the opposition, you get to use the insurance company’s fancy letterhead. That letterhead is probably more important than the letter itself, because what it says to the other party is, “I’m in this for the long haul, and you know it, because I’m backed by a big insurance company.”

There’s significant gamesmanship in play here, because the other party doesn’t know whether you obtained your insurance five years ago, or last month. They have no idea if you’re going to have to pay $20,000 or half a million dollars before the insurance company gets involved. It can become a poker game at this point, because if it turns out the former is true, you can afford to drag things out in court. But if they press their luck and it turns out that the latter figure is closer to the truth, then odds are that you can’t afford to tackle the issue in court.

Patent infringement insurance will only cover your court costs if you’re likely to win.

Something to keep in mind before you sign up for a policy: For an insurer to pay for your patent litigation costs, you need the opinion of a patent counsel stating that you have a 51% or better chance of winning. Obtaining this opinion isn’t cheap—it’s usually about $5,000. Patent insurance isn’t intended to cover the cost of a legal ‘Hail Mary,’ If the counsel doesn’t like your odds, then you’ll have to pay entirely out of your own pocket if you wish to proceed with litigation.

For more guidance as to whether it’s a good idea to obtain patent infringement insurance to help protect your intellectual property, it’s advisable to contact an experienced patent lawyer. Michael O’Brien is a Sacramento patent attorney with a wealth of expertise in advising patent holders on how to best protect their inventions.