What is Patent Insurance and Do I Need it? Episode 134

Two Types of Patent Insurance

The first thing to know is that there are essentially two types of patent insurance: offensive insurance and defensive insurance.

If you think about it, if you’re selling a patented product, there are two possible scenarios. You might want to sue someone for infringing your patent, but you also might be on the receiving end of a lawsuit. If you want to sue someone, that’s offensive—you’re going on the attack. If you’re being sued, then you’re on the defensive.

Defensive Patent Insurance

Let’s talk about defensive patent insurance first. You might want to get this whether or not you have a patent on your product. That makes sense because even if you don’t have a patent, you can still be sued for infringing someone else’s patent.

Defensive patent insurance covers a few things. It may cover the cost of defending your company in a patent lawsuit by paying a portion of legal fees or damages. It’s especially useful if your business operates in an industry where there are lots of patents.

Offensive Patent Insurance

Offensive patent insurance—sometimes called abatement enforcement coverage or patent enforcement coverage—is only necessary if you actually have a patent. You can’t sue anyone for patent infringement if you don’t have a patent.

This type of insurance can cover the costs of taking a party to court for patent infringement, including a portion of your legal expenses. It’s also sometimes referred to as enforcement coherence.

Why Consider Patent Insurance?

Why would you want patent insurance, and when is it worth it?

Patent infringement damages can be huge—tens of millions of dollars or more. In the patent case Polaroid v. Kodak, there was a $900 million damages award. In Honeywell v. Litton, $1.2 billion was awarded.

I read one study that said a patent lawsuit costs about $3 million in legal expenses for inventions worth between $1 and $25 million. That doesn’t even include the damages, which average about $9 million for inventions in that value range.

How Much Does Patent Insurance Cost?

Costs vary depending on the type of plan. For an offensive policy, it may pay around 75% of your legal costs. Like any insurance plan, there’s a deductible, so you’ll need to put up some of the initial costs yourself.

Insurance companies require deductibles because they don’t want patent owners to file lawsuits recklessly. If the company paid 100% upfront, a patent owner might go lawsuit-crazy, even without a strong case. A deductible helps curb that behavior.

For a defensive policy, the insurance company usually covers a percentage of the defense costs. Let’s say you have a policy for $1,000,000 and you’re charged a 3% premium—that would be about $30,000 per year.

Typically, premiums range from 1% to 5% of the insurance amount. Rates can range from a few thousand dollars annually to over $25,000 depending on factors like the industry you’re in, how many patents you have, your deductible, and the overall coverage amount.

Read the Fine Print

You’ll want to carefully read your policy to understand exactly what’s covered. Some insurance may only cover damages if you’re found liable for patent infringement, but not your legal fees. Pay attention to details about deductibles and co-pays.

Also, be sure to check whether your policy is for specific patent insurance or if it also covers other types of intellectual property like trademarks and copyrights.

Should You Get Patent Insurance?

Whether you should get patent insurance is a decision for each individual company. If you lose a lawsuit, is the amount so high that your company would be finished? Or could you absorb the loss?

Remember, there are millions of issued patents just in the U.S.—plus many more in foreign countries. You can think of them as paper landmines. Whether or not you want to insure yourself against these landmines is your decision—but you should at least be aware of them.

If you’re a company and have never considered patent insurance, it’s something you should bring up with your insurance agent. There’s a good chance you already have insurance for other parts of your business, but patent and other IP insurance usually isn’t included in a standard policy.

I’m Adam Diament, and until next time—keep on inventing.