Patent Litigation Insurance

Patent litigation insurance definitely exists, and every so often a casual observer will be confronted by the enormous cost of litigating a patent case and suggest that maybe you should get insurance. After all, there are a lot of other kinds of insurance for the normal hazards of doing business: product liability, business interruption, even cyber attack. So why not patent litigation insurance?

The problem is that insurance works by grouping a whole bunch of entities together that all have similar risk, and then figuring out how to get them to share that risk while still making some money on the premiums. That doesn’t work for patent litigation because companies have wildly different risk profiles. It is impossible to take a group of companies, somehow average out their risk of patent litigation, and then calculate a premium that both covers that average risk and makes you some (but not too much) money on the side. The companies will either overpay or underpay.

As a result, patent litigation insurers take a look at your individual risk profile, figure they can estimate the risk better than you can, and then charge an individualized premium to make sure they are covered. Public reporting places the annual cost of patent litigation insurance at about 2-5% of the insured amount, with the addition of hard liability caps and co-payments. Most big companies decline those terms and end up self-insuring or mitigating risk through license aggregators like RPX.

But still patent litigation insurance seems to fascinate, especially the academics. In a November 2018 paper titled The Effect of Patent Litigation Insurance, researchers examined the effect of recently introduced insurance on the rate of patent assertions. And they found (headline!) that the availability of defensive insurance was correlated with significantly reduced likelihood that specific patents would be asserted. They conclude:

Whatever the merits of specific judicial and legislative reforms presently under consideration, our study suggests that it is also possible for market-based mechanisms to alter the behavior of patent enforcers. Indeed, it has been argued that one reason legislative and judicial reform is needed is because collective action is unlikely to cure the patent system’s ills because defending against claims of patent infringement generates uncompensated positive externalities. Our study suggests that defensive litigation insurance may be a viable market-based solution to complement, or supplant, other reforms that aim to reduce NPE activity.

The Effect of Patent Litigation Insurance at 59-60.

But there is a very important caveat: the insurance company selected in advance every patent they would insure against. IPISC sold two menus of “Troll Defense” insurance: one for insurance against 200 specific patents, and one for insurance against an additional 107 specific patents. Indeed, this is how the researchers were able to assess whether assertions went down. (Other patent litigation insurers use more complex policies that do not identify specific patents.) In addition, IPISC capped the defense insurance limit at $1M, which is well below the cost of litigating your average patent case. This is a very narrow space for patent litigation insurance!

IPISC must have had confidence they could accurately quantify the risk associated with these patents. The insured patents had tended to be asserted before by well-known patent assertion entities. I suspect the prior assertions settled quickly for relatively small amounts because that’s how these entities tend to work. Indeed, that is the whole business model. But throw in the availability of insurance specific to these patents and now you have a signal that many potential defendants will not simply settle and move on. Wrench in the model, assertions go down.

So yes, this narrow type of patent litigation insurance might be useful if you are an entity concerned about harassment by specific patents in low value patent litigation. Interesting study, your mileage may vary.