The convergence of technology that led to the development of smartphones and tablet computers is forcing companies that have never crossed-paths before to face off against each other in court.
The convergence of technology that led to the development of smartphones and tablet computers is forcing companies that have never crossed-paths before to face off against each other in court.
Apple and Samsung are two such companies. They originated in different parts of the world and began in different industries, with the former making computers and the latter selling food. But in 2012, a US court told Samsung to pay Apple $1.05 billion in damages in 2012 after finding the South Korean company’s technology business guilty of infringing six design and utility patents.
This particular case is all too common—Apple and Samsung are engaged in other patent battles around the world, and the market is bigger than the two of them—requiring companies to think about their risk management strategies as they enforce and protect their own IP, all the while trying to not infringe the rights of others.
Despite the attention that patent holders are paying each other, the associated risk and solutions to address it are “still an emerging area”, according to Thomas Jones, partner at law firm McDermott Will & Emery LLP. “It’s not something that is currently done by everyone.”
Marsh’s 2013 captive benchmarking report showed that of the 886 captives that were benchmarked, 17.2 percent have parent companies in the healthcare industry, 3.7 percent in technology and telecommunications, and 2.1 percent in life sciences. These are the types of industries in which innovation and patents to protect those innovations are essential.
In particular, the types of risks that technology companies write vary, but Marsh’s report showed that technology companies are writing IP risk.
The report said: “IP is one of the toughest risks for technology clients to address, as there are no off-the-shelf risk-transfer solutions, and many industry-wide initiatives are still trying to get off the ground.”
A source, who works in captive insurance and also does some IP work, says: “Captives do look at it and we have captives that write the risk. You have to keep in mind that the captive is there as a tool for the risk manager. The risk manager has to decide what makes sense to go in the captive and what makes sense to stay in the commercial market—if in fact it’s available in [that] market.”
Tracie Grella, global head of professional liability, financial lines, at AIG, says that the company has a patent policy that it has been offering since 1996. “But at any given time, we have a handful of insureds,” she says.
“What we find is that it is about the pricing and the risk appetite of insurance companies. We would be cautious to offer that type of coverage to some of the high profile technology and pharmaceutical firms. Those would be very difficult areas in which to offer patent infringement coverage.”
“Then, just in general, if we do offer quotes to other types of companies, we manage the limit closely and we have high retention and high premiums. We do quote—we get a lot of requests about patent coverage, a lot compared to the amount of accounts we actually write. We do put out though a number of quotes each year, but most of the time, when the companies see the type of pricing we’re looking for, they just aren’t interested. It seems that if you want to have some kind of mechanism in place, the captive market is really the only market to go to afterwards.”
Simon Beynon, who works in global risk solutions at AIG, agrees.
He says: “Generally speaking, captives can participate in risk retention for most lines of business. It’s really dependant on the desire of the captive’s parent to retain the risk, or perhaps because the insurance industry doesn’t adequately address those exposures in an efficient manner. Insurance carriers either don’t understand the risks, they don’t have enough information about the risk, or the premiums they feel they need to cover that exposure aren’t something that’s acceptable to the parent company.”
The insurance industry’s issue with patent risk is “the potential for significant costs”, says Grella.
“The other issue is that many times you could have systemic risk if you write a book of this because a patent on a certain technology could have far reaching implications. You’ve got this issue that you could have litigation on this one kind of commonly used technology, hitting across multiple industries and multiple insureds.”
Beynon adds: “I think in the absence of risk transfer to the established insurance industry, companies really only have an option of self insurance, which doesn’t allow for any financing of risk over a period of time, it just means that if a loss happens you have to bear that loss yourself. When you introduce a captive, it provides the ability for financing that exposure over a period of time and allocating premiums to the operations that present the exposure.”
Companies looking to write this type of risk into their captives should remember that “they would still need to manage their aggregate exposure and price it appropriately, and manage the coverage on the policy wording they’re using”, says Beynon.
Captives can and do write IP risk, and with patent litigation featuring so heavily in the headlines, their parents would be wise to look at how they protect themselves in the event of a legal challenge. For now, this is an ‘emerging risk’, but for how long remains to be seen.
