Minding the Store.

New and redesigned insurance policies are helping companies protect their intellectual assets.

The fledgling market of intellectual property insurance may be coming of age as a result of some recent high-profile court cases and the growing perception that general liability policies may not cover all Internet-related risks.

As companies become more mindful of the importance of their intellectual property--the fruits of mental labor that are protected by patent, trademark, copyright and trade-secrets laws--they also are demonstrating an increasing awareness of the need for specialized insurance in this technological age to ease the costs of litigation and sometimes huge damages.

Attorneys trace the dawn of this turnaround to the late 1980s, when Polaroid Corp. successfully sued Eastman Kodak for marketing an instant camera and was awarded $870 million in damages. Currently, the Pullman Group is suing Prudential Insurance Company of America in two lawsuits for $3.3 billion total for fraud, misappropriation of trade secrets and breach of contract, all related to Pullman's allegation that Prudential stole its idea for the "Bowie" bond, which securitizes music royalty-backed income streams. And in late September, the Internet song-swapping service, Napster, said it had agreed to pay $26 million to settle a copyright lawsuit with songwriters and music publishers. Napster does not have intellectual property insurance, a company spokesman said.

At least one insurer thinks the Napster case alone may make a number of companies re-evaluate their approach to the specialized market of intellectual property insurance.

"I do believe that insureds understand and recognize the exposures," said Kae Lovaas, president of global technology for the St. Paul Cos., St. Paul, Minn. "But every time it becomes real for one of their counterparts, it is one more reason to go out and be sure that you've got the appropriate controls in place, including the transfer of risk through insurance."

Lovaas said St. Paul Fire & Marine Insurance Co., which has offered this coverage since 1999, has seen sales of its cyber-liability policy increase markedly in 2001. Even before the Napster settlement, she said, interest was picking up in this specialty coverage on word that the Insurance Services Office Inc. had filed revisions to its comprehensive general liability (CGL) form that would be very explicit about Internet-related risks. The policy, which does not cover advertising, broadcasting and publishing, now also will exclude Internet-access providers and Web site creators, said Dave Dasgupta, a spokesman for ISO. "This area was so new that we wanted to make it very clear that this was not included in the standard CGL," he said. ISO also created separate exclusions for hosting chat rooms or bulletin boards and their contents, as well as four categories of intellectual property: trademarks, copyrights, patents and trade secrets.

"I think those who had been hanging on to the idea that there may be some gray areas of coverage and that they may be able to prevail in a coverage dispute are now questioning that strategy," Lovaas said.

Critical Assets

Also fueling this interest is a changed perception of what constitutes a company's assets. Fifty years ago, nearly all the secured assets of corporations were hard, tangible assets, such as inventory, said Andrew B. Katz, intellectual property and technology partner in the business law department of the law firm Cozen O'Connor in Washington. "Now, a large part of the assets are the patents, the trademarks, the branding," he said, noting that something like Nike's swoosh design or fast-food giant McDonald's clown character, Ronald McDonald, is so essential to these businesses that it becomes their major asset.

In 1999, the estimated value of intellectual property owned by Standard & Poor's top 500 companies was $3.4 trillion, according to figures compiled by Patent Enforcement & Royalties Ltd.

"More companies are recognizing how critical their intellectual property is to their business success, so they are becoming more aware of infringement," said Michael B. Fein, who chairs the Philadelphia-based intellectual property department of Cozen O'Connor. "Because of that, the management is willing to invest in protecting its property."

This recognition is filtering down to the smaller companies as well, said Sheila A. Millar, a partner in the law firm Keller & Heckman LLP, Washington. As a result, she added, the issue of who has the rights to intellectual properties is spawning disputes that lead to the question of what, if any, insurance coverage applies. These disputes also are likely to include multiple allegations, such as infringing on a trademark, false advertising and defamation, Millar said. "More and more litigation is the trend," she said.

Katz expects to see "more mistakes, which are going to be actionable," he said. "It's going to lead to more disputes, because it's hard to delineate where one patent ends and one begins or delineate between whether a copyright has a similar look and feel of another copyrighted work."

But he thinks that the role of attorneys in dealing with these matters is changing. "The onus is really going to be on lawyers to not only make sure their clients are protected from an intellectual property standpoint--because that's always been the case--but they're going to need to be a little more proactive," he said. Traditionally, a company will tell a law firm that it wants a trademark filed, and the firm will file the trademark on its behalf, but they're not really partnering with the company, Katz said. "There's a big difference between approaching the law that way and approaching it in terms of getting an understanding of what the client needs and suggesting to the client what the best strategies are for accomplishing the goals that the company has," he said.

Companies have strong incentives to safeguard their intellectual property, Millar said. She recalled hearing remarks by the general counsel of Harley-Davidson, who described the private investigatory firms that were on retainer to his company to investigate the counterfeiting of Harley-Davidson merchandise. "Many of these companies make as much or more money selling licensed goods as they do selling their standard brands," Millar said. "If you have fake T-shirts or key chains or coffee mugs or whatever, you may think, 'What's the big deal?' Well, a few thousand T-shirts here, a few thousand coffee mugs there, a few million key chains--these numbers add up, and then the revenue loss becomes significant."

Another concern for the insured is the potential product liability aspect, Millar said. Having a company's brand name on a counterfeit product puts the brand owner in jeopardy if the fraudulent material is judged hazardous and subject to a lawsuit or product recall. Recalls present special insurance issues apart from counterfeiting, because the costs are typically excluded from insurance coverage. Even if the producer disavows the counterfeit goods--and is able to convince the Consumer Product Safety Commission that it is not the manufacturer--the company still is at risk from property liability lawsuits if a counterfeit product injures someone and may face investigative and defense costs, Millar said. This is over and above the issues that companies encounter in policing their intellectual property to maintain their rights, she said.

Categories of Coverage

Only a handful of insurers offer specialized intellectual property coverage, including Lloyd's, American International Group and St. Paul Cos. These coverages fall into two categories: defense and enforcement. Defense is a third-party coverage that pays for the defense costs of an intellectual property infringement lawsuit and the settlements or judgments that could result. Enforcement products apply to the first-party side of the issue and provide the resources necessary for a company to fight a competitor that is infringing on a patent or abusing it.

Tina Kirby, an underwriter at Beazley, a Lloyd's syndicate based in London, said in general the market offers a combined defensive and enforcement intellectual property package in the United Kingdom and Europe, and separate stand-alone covers in the United States. During the first quarter of 2001, she said, U.S. insurers started to exclude patent coverage from standard errors and omissions policies because patents were seen as an area of higher risk and increasing litigation. The rest of the usual package--copyright and trademark coverages--remained optional within the E&O package. In the five months, she added, enforcement stand-alone cover has definitely taken a back seat to defense cover. "A lot of insurers seem to be retreating to more standard products," she said.

"In my opinion, it's been a fairly volatile market in terms of form and approach," Kirby said. Considering the very high loss ratio results experienced by some underwriters in recent years, few syndicates have been offering intellectual property coverage, and of those, some have been drifting in and out of the market, she said. "Many insurers seem to be taking a new approach to risk analysis by requiring a pre-binding risk review, a methodology we have employed for many years in recognition of the need to understand the fundamental value of the client's patent portfolio and the environment in which they operate."

Effects of the Internet

Widespread access to the Internet has made intellectual property protection even more complex. "There seems still to be some general sense out there among the public that anything that's on a Web site is free--that you somehow lose your copyright protection if you are on the Web, which of course is not the case," Millar said. "But as a practical matter, when in the business environment you post a lot of information, there certainly is the chance that people will cut and paste and use it. And then tracking any infringement becomes potentially more complicated."

While intellectual property guidelines advise companies on the use and symbol identification of trademarks, Millar has found that many clients lose their trademark rights by allowing their marks to become generic. "In the fast-paced environment of the Web, even the really large, sophisticated companies can let some of these things fall through the cracks," she said. "Imagine how difficult it is for the smaller companies that don't have that level of sophistication."

It's crucial that companies understand and identify the intellectual property they own, in addition to the property they don't own but use or hope to use, Millar said. Then they must deal with an array of issues, including bulletin boards and public forum space, where visitors to their Web site might be misusing someone else's intellectual property, she said.

"If somebody posts a picture of Mickey Mouse, you can have Disney all over you if you don't take steps to deal with it," Millar said.

Since the Internet is virgin territory in the protection of intellectual property, companies should undertake internal audits of their organizations to understand where their exposure lies, Lovaas said. Then they must start to plan for it just as they would with any other exposure, asking how they can mitigate potential loss and how they can transfer loss, she said. "In doing that, the direction absolutely must start at the senior level of the corporation."

In the United States, many of the existing intellectual property laws and regulations can apply in cyber-space, Millar said. Where they can't, the tendency has been to adopt specific laws--such as the Digital Millennium Copyright Act, which provides that online service providers will not be liable for copyright infringement--rather than attempt to develop a code to govern the Internet, as the European Union has done, she said.

"The bottom line is that the e-economy does create some nuances and differences on intellectual property that are important for companies to understand and important for insurers to understand," Millar said.

Creating Appropriate Policies

Last April, Hartford Financial Services Group introduced an enhanced CyberFlex coverage designed to meet the needs of small and midsize businesses that have some internet exposures but are not pure dot-com companies. The offering includes a host of coverages, including copyright infringement. The company said it was addressing these business needs after finding that 80% of the business owners it had surveyed did not know whether their standard business insurance policies covered these types of risks.

St. Paul Cos., which began insuring technology companies 17 years ago, began offering its cyber-liability policy to technology companies in 1999. The policy provides the intellectual property covers, including copyright and trademark, for electronic transfer of information and data. But beginning this year, St. Paul Fire & Marine expanded the offering to all commercial entities that do business on the Internet and have an exposure from intellectual property because of how they transact that business, Lovaas said.

The company also is preparing an Internet liability policy that will be similar to its cyber-liability policy, but will add two more coverages, she said. Both are specifically limited to exposures through the Internet. One coverage is for third-party liability for the safeguarding of confidential information, and the other is for third-party liability for transmitting a virus through the Internet, Lovaas said.

"We think that those are particularly responsive to the issues that have occurred and the changes in the exposures that are taking place," she said, adding that third-party coverage is more in demand at her company.

In its network of intellectual property coverages, St. Paul Cos. offers both standard property and liability policies, which have specific enhancements for the technology industry and specialty coverages designed to interact with the standard policies, Lovaas said.

"The people we see who are more interested in buying insurance are clearly the middle-market customers," she said. Lovaas suspects that larger companies, while very risk-sensitive, are self-insuring against intellectual property risks.

"Looking at our Internet liability policies in general, we don't sell any for less than $5,000," she said. "Our deductibles are usually nothing less than $10,000, and we prefer to keep our limits in the $5 million to $10 million range."

Lovaas thinks the insurance industry is barely seeing the tip of the ice-berg for this market. St. Paul Cos. views this arena as a multibillion-dollar insurance premium industry. Yet the numbers Lovaas has heard indicate that only 4,000 to 5,000 intellectual property policies have been purchased. "That's a pretty small number for a market that size," she said.

Disputatious Domains

One of the most disputatious areas within intellectual property issues these days involves domain names. Fein said Cozen O'Connor is seeing "domain name disputes and domain name problems quite a bit--more now than three years ago. It's just straight problems where somebody uses a domain name or a Web page that is using somebody else's trade-mark or trade name."

Fein sad one of his clients owns Chem Web as a trademark and has the Web site, ChemWeb.com, which provides information to those in chemical research and the chemistry industry. Another company that has no association with his client started calling itself Euro Chem Web and listed its Web domain name as EuroChemWeb.com. "We told them to stop, and they're stopping," he said.

If these conflicts evolve into law-suits, one way to settle them is to meet with an arbitrator and go through the dispute-resolution process provided by the World Intellectual Property Organization. Fein said Cozen O'Connor looked into this, but it later decided that it would be more advantageous for the owner of a trademark to sue in federal court. "Then you can enjoin them from using the thing as a trademark on their Web site or as a domain name," he said. "The domain name registrars only control the Web address, but they don't control what's on that page. So if they are infringing your trademark on the Web page, the domain name is not the only thing you're worried about."

With a weakened economy, a rash of lawsuits may surface on another front as many of the advertising, marketing and joint-venture deals that were quickly put together at the height of the dot-com frenzy start to unravel, Katz said. "I think you're going to see a lot of litigation with respect to who owns what rights between the parties, whether it's cobranded materials or whether it's patents or copyrights," he said.

Katz said he represents some smaller Internet companies that already have had such agreements go bad. "One of the big issues they have to face is, can they collect? And that involves investigation of whether the company that has gone down is insured and whether there is a mechanism to get payment out of it," he said.

As intellectual property litigation increases, more attorneys are entering this practice. Millar said that when she was interviewing law school graduates for admission to Keller & Heckman some 10 or 15 years ago, "everyone wanted to be an environmental lawyer, because it was the hot, new field. Now, everybody wants to be an intellectual property lawyer, because it's the hot, new field."

Katz thinks that intellectual property is especially attractive to younger lawyers. "It requires an understanding of technology that's really cutting edge, so if you're coming out of school and you've been working on cutting-edge technology, it's much easier to join the fray than it is if you're a straight corporate attorney where the experience of doing years of deals is essential to the practice," he said.