US trends surrounding four prominent IP finance insurance types

IP insurance expert Andrew Mutter writes that coverage evolves quickly and chief IP officers must familiarise themselves with policies for IP campaigns, IP portfolios, IP judgments and adverse judgments

There have been significant developments in the appetite for IP-related risk in the insurance markets over the last few years, and for good reason. Patents are uniquely suitable for innovations in contingent risk insurance.

Patents represent a massive and increasing amount of value in today’s global economy, and yet by their very nature, they are intangible legal assets that can only prove their value through the power or the threat of the court system. They are, essentially, assets or liabilities contingent upon their ability to be enforced in the applicable judicial system – exactly the thing that contingent legal insurance seeks to insure.

Used properly, contingent legal insurance can mitigate some of the unique problems that IP finance often presents, and help innovators, IP-rich companies, and IP investors achieve strategic goals. Innovators, operating companies, patent monetisation companies, and their various investors and counsel should educate themselves on these solutions and keep abreast of the ever-changing art of the possible in the marketplace.

The acronyms and jargon of the insurance industry in this space can be more than a bit overwhelming: JPI, AJI, WIP, D&C, ROL, CPI, CPI (the other one), wraps, portfolios – the list goes on! At its core, however, the proposition of contingent legal risk insurance is simple and applies across all formulations of the product.

Companies regularly have either:

uncertain (contingent) legal assets – patents being one subset;
they have uncertain (contingent) legal liabilities, with patent infringement exposure being one subset; or
many operators in the global IP space have both, and usually at the same time.

In the right circumstances – but, critically, not all circumstances – insurance can be leveraged to guarantee a core value to a company’s contingent legal assets or cap a company’s legal exposure to a specific legal claim. This can be a potent tool with multiple applications.

While this space continues to evolve and grow, there are broadly a handful of key categories to understand and become familiar with:

IP campaign and work-in-progress (WIP) insurance: focused on insuring a core value to a specific IP campaign for the patent holder or the law firms on contingency;
IP portfolio insurance: focused on larger pools of IP assets with multiple monetisation strategies;
IP judgment insurance: insuring a specific verdict on appeal; and
Adverse judgment insurance: focuses on the liability side of the equation and caps worst-case outcomes.

This article provides a thorough look and reveals trends in the US market for each type of coverage.

IP campaign and WIP insurance

New patent campaigns often present common problems to companies, counsel and investors. Particularly in the US, patent litigation can be very expensive, requiring a significant outlay of capital just to get to trial. Additionally, patent litigation often takes a long time – getting to trial can take years, and even then, significant patent awards can go up and down multiple times on appeal and remand.

Even well-capitalised operating companies are reluctant to invest that much in legal expenses over such a potentially long time before seeing any return, even when the patent portfolio in question is of high quality and value. Additionally, a less well-capitalised company may be in desperate need of operating capital, not just capital to support the litigation, creating even more capital restraints.

IP campaign insurance is one tool to help solve this problem, at least when dealing with particularly diverse and high-quality patent assets. In the right circumstances, a policy can be placed to ensure that the campaign realises at least X million dollars over Y period of years (usually at least six years for an IP campaign).

From there, the policy can be leveraged to achieve a variety of strategic goals:

the patent holder can attract better financing now that this uncertain asset has been made certain with an A-rated insurance paper;
investors can provide capital with greater assurance that even though the investment period may be a long one, a minimum result is certain;
a greater quantum of capital can be sourced for operations expenses over and above any litigation funding needed; and
for a well-capitalised operating company, the CFO or general counsel can feel confident she is making wise use of corporate legal expenses with the assurance of the policy.

Even law firms can utilise this solution – these WIP policies allow law firms to take higher concentration risks in high-quality but capital-intensive IP campaigns while at the same time letting the billing partner down the hall sleep at night that such gambles are being hedged against.

IP portfolio insurance

IP campaigns, however, are just one example of how these insurance solutions can be deployed, and an IP monetisation strategy does not have to be strictly tied to litigation to be potentially eligible for an insurance wrap. Any time you have an aggregation of patents or investments in patents, there could be an insurance solution to help with monetisation.

Some scenarios include:

An operating company could be ready to spin off a patent portfolio that has existing or future potential for licensing revenue – an insurance solution could support that sale and increase the economics for the seller.
A non-practicing entity could be looking to leverage its current consistently performing licensing book to buy more high-quality patents – again, an insurance wrap could be deployed to allow the company to borrow against the existing patent assets at a lower cost of capital.
A law firm or legal finance company could be looking to accelerate returns on a current seasoned book of IP litigation contingency fee cases or investments – a policy guaranteeing a minimum outcome can significantly enhance the economics of the trade.

Collateral protection insurance

A related, but distinct product that is of great value to earlier-stage companies, but only works in specific circumstances, is collateral protection insurance, or CPI.

The solution is simple in concept: there are relatively early-stage companies that are IP-rich and appear to be generating enough revenue to support a new debt facility that will allow them to significantly level up. However, because their only real collateral is their intangible IP, lenders may not be willing to lend at digestible rates. A CPI policy ensures a minimum value of the company’s IP assets if the company defaults on the loan and the lender cannot realise the insured percentage of their principal.

This solution works excellently when the company is a good credit risk, and there is at least some true independent value to the IP, even if the IP had to be sold in a distressed situation. It decidedly does not work, however, when the company is too early stage to have a high conviction about its ability to service the debt, where the debt contemplated is too aggressive, or where the IP valuations don’t take a truly pragmatic and conservative view of how much the assets will likely sell for if things go badly.

Finding the companies for which this works can be difficult, but it can be an incredible tool when it does work—giving the companies access to a loan and cost of capital they would otherwise not have, and allowing them to avoid another round of highly dilutive equity investment.

Judgment preservation insurance

On the asset protection side, IP insurance got its start in judgment preservation policies and associated financings. These policies are compelling and useful, particularly in US patent litigation for the same reasons discussed previously – patent litigation in US courts tends to take significantly longer and cost significantly more than other types of litigation. Even when you finally receive a significant award it can take years of appeal, remand, and appeal again before there is either a material settlement or a final judgment.

Enter scene: judgment preservation insurance, or JPI. A JPI policy insures a core value to a verdict, guaranteeing that upon final, non-appealable adjudication of the dispute the claimant will have a judgment of at least X% of the original verdict. This policy can then form the basis of a non-recourse, lower cost-of-capital financing – bringing forward a portion of the current verdict now for strategic use.

Many companies have been able to leverage these policies to reinvest in their companies, expanding manufacturing facilities, sales teams, and R&D work.

But like any pioneering insurance solution, as claims begin to realise, markets inevitably must adjust to consider whether they have underwritten the risks correctly, looking closely at deal selection, price, and structure.

The IP JPI market is going through an evolution now, with:

the limits carriers are willing to deploy on a given deal shrinking;
rates for the policies materially increasing; and
more attention is being paid to the size of the total insurance programme and the size of the underlying judgment.

Large IP judgments statistically receive significantly increased scrutiny in the US Court of Appeals for the Federal Circuit compared to smaller verdicts, and underwriters are taking such patterns into account broadly when looking at any new IP judgment opportunity.

That said, the core value proposition of these policies should be durable. There are very good IP judgments that will prove resilient on appeal and represent good trades for underwriters as long as pricing and total limits are right. Likewise, claimants will always have reason to buy these policies even at higher rates as they represent tremendous opportunities to bring forward judgment proceeds now for strategic use, and they help hedge against downside risk that capital and time-intensive IP assets inevitably present.

Adverse judgment insurance

One thing that often can be overlooked when talking about insurance solutions in the IP space is the tremendous opportunity to utilise these products to hedge against potential liabilities as well. Regular players in global IP inevitably face legal exposures, and in the right situations, these can be mitigated with insurance as well.

One common problem on the global stage is potential liability for enforcing injunctive relief against an infringer in Germany (or, we are soon to see, in a Unified Patent Court action). The patent holder enforcing the injunction can secure a policy that protects against any damages that could be assessed against it if the injunction is later flipped.

Companies facing significant cross-claims in litigation can at times use insurance to protect against catastrophic outcomes and balance their risk. Likewise, defendants can take out catastrophic loss insurance when faced with significant potential liability from a new patent suit, but where there is an objective way to reach a high conviction that some top portion of the asserted liability is very unlikely to be obtained.

These defence-focused solutions can be used to manage investor relations, obtain better new investments or debt facilities, release reserves, and generally achieve better total corporate risk management.