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INSURANCE COVERAGE FOR INTELLECTUAL PROPERTY LITIGATION

What if your company gets involved in a lawsuit over IP issues? Knowing what your insurance policy covers can be critical.

• Introduction

There are at least two common situations in which your company needs to find insurance coverage for intellectual property litigation. One situation occurs when your company is a defendant in a lawsuit involving IP issues. This is of particular concern if your company is a start-up or otherwise “thinly capitalized” company. If so, the defense costs alone could cause extreme cash flow problems, or, at worst, spell financial disaster. The other side of that coin is when your company is suing another company that you suspect to be thinly capitalized. In that case, one concern is making sure there will be a fund of money from which to pay any settlement or monetary judgment your company obtains through litigation against the defendant company.

This article cannot give an in-depth analysis of all aspects of insurance coverage issues related to IP litigation. Each case is unique and should be evaluated by an experienced coverage attorney.

• The Comprehensive General Liability (CGL) Insurance Policy

The most common type of policy for most companies is the Comprehensive General Liability or CGL policy. The first place to look for coverage in IP disputes is the “Personal Injury and Advertising Injury Liability” portion of the policy. Because the CGL policy has changed many times over the years, only generalized statements can be made about what is and is not covered. As a very general statement, the following causes of action may be covered by the CGL policy, provided the alleged conduct is causally connected to advertising:

• Copyright Infringement
• Trademark Infringement
• Trade Dress Infringement
• Misappropriation of Trade Secrets
• Unfair Competition
• Disparagement
• Defamation
• Certain Internet Torts

As a general rule, patent infringement claims probably will not be covered. Each of these potential coverages is, of course, subject to potential exclusions and limitations of coverage. Again, each case should be evaluated by an experienced coverage attorney.

• Other Insurance Coverage

In addition to the CGL policy, some companies may have an Errors and Omissions Policy (commonly referred to as an “E & O” policy), a Directors and Officers Policy (commonly referred to as a “D & O” policy), or some other kind of specialty policy. Depending on the facts and allegations of the case, these policies also may need to be examined for potential coverage.

• The Duty to Defend vs. The Duty to Indemnify

The carrier’s duty to defend its insured in a lawsuit is broader than the carrier’s duty to indemnify against a loss. The duty to defend is determined by comparing the allegations in the pleadings to the language of the insurance policy. This is known as the “ eight corners ” or “ complaint allegation rule. ” The carrier is obligated to defend the insured if the petition or complaint alleges at least one cause of action potentially within the policy’s coverage.

As alluded to above, the carrier’s duty to defend can be a valuable right in a long and protracted IP lawsuit. Because of this, your company should be very diligent in notifying its carrier about such a lawsuit. Lack of proper notice could give the carrier a defense to coverage, so giving timely and proper notice is very important.

• Reservation of Rights Letters

After a carrier has been notified of a claim, it is common for the carrier to send what is referred to as a “reservation of rights” letter. In this letter, the carrier basically tells its insured that certain claims may not be covered under the terms of the policy. At this point, the carrier typically offers to provide defense counsel of the carrier’s choosing.

If your company gets a reservation of rights letter, you should consult an experienced coverage attorney before accepting a defense subject to the reservation of rights. This can be especially important if your company wants to be represented by counsel of its own choosing. Typically, the carrier will offer to provide your company with an attorney who has a contractual agreement with the carrier. Remember, an attorney chosen by the carrier may be ethically prohibited from advising your company about insurance coverage opportunities or defenses. If your company does agree to be defended by counsel chosen by the carrier, you should consider retaining separate counsel to advise your company on insurance coverage issues.

DISCLAIMER:

The above information is intended only as general information, and is not intended as a substitute for legal advice regarding a specific factual situation. If you believe you have an issue regarding insurance coverage for intellectual property, trade secrets or confidential information, you should consult competent legal counsel. No Attorney-Client relationship is created unless and until we formally accept representation of you. Please contact us for further information at (512) 225-5800.

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