Process protection: armed with a boost from the federal courts, insurers are increasingly turning to patents to prevent competitors from copying proprietary business practices. (Industry Strategies).

Increasingly, insurance companies are taking advantage of a recent court decision permitting the United States Patent and Trademark Office to grant patents on business methods. In the past, the prospect that competitors would immediately copy new features and efficiencies might have deterred companies from making a major investment in automating business practices. Now, insurance companies have a better opportunity to enjoy exclusivity in their innovations for the term of a patent. They are more apt to think of their people as inventors and their ideas as inventions.

As a result, the Patent Office has been issuing insurance industry patents frequently. These patents grant to their owners the exclusive right to enjoin others from selling or using patented business methods, or making patented processing systems. Infringers also owe damages in the amount of a reasonable royalty or the patent owner's lost profits.

Licensing Options

Protecting a competitive advantage often is the most important reason for patenting an invention, but patents provide value in other ways. Licensing inventions in return for fixed fees or use-based royalties can generate significant revenues. As an alternative to cash, a patent owner may license a supplier to provide the technology to others in exchange for discounted pricing. And, patents can deter a competitor from bringing a lawsuit, such as a patent infringement action, if it fears the potential defendant will counterclaim for patent infringement. Cross-licensing of patents can provide a basis for settling a commercial dispute.

Patents can provide evidence to help justify a claim for a research and development tax credit, and the patenting of business methods opens up a new area of patented subject matter. Companies that don't think of themselves as having a research and development department in a traditional sense are taking a fresh look at the sort of development activities that may qualify for the tax credit.

Insurance companies are not limited in the subject matter they can patent. Their innovations need only be new and not obvious in light of known practices. Insurers file for patents when they solve practical underwriting and claims administration challenges, as is demonstrated by recently issued patents and published patent applications. Specialized systems also are represented among recent patents.

Considering the Idea

It is not as difficult to obtain a patent as many people think. Employees and their employers too often judge new ideas too quickly as not significant enough or not new enough to be worthy of a patent. In fact, they should take the time to ask whether die idea would benefit the company or its customers, and have real value if competitors could not copy it. If this is true, the employee should disclose the idea to a designated supervisor for review by those who have a feel for the level of advancement required by the Patent Office for allowing a patent. Searching can be done in the same records the patent examiner will review to help determine whether a patent will likely be granted.

The Patent Office issues patents only for those inventions found to be novel--that is, not known before--and more than an obvious advance over prior knowledge. To determine whether an improvement to an insurance business method is not obvious, a patent examiner typically looks at whether the components of the method are separately known in the field, and whether there is some suggestion or motivation to combine them in the manner now described by the inventor. But, the Patent Office examiners are not permitted to use hindsight to conclude the invention would have been obvious to the inventor; they must apply the test at the time the invention was made.

Subject to Interpretation

Until 1998, business methods could not be patented. Innovators of business systems could only attempt to patent the computer systems and technical software used to implement the business method. Then the U.S. Court of Appeals Federal Circuit reinterpreted the U.S. patent laws to add methods of doing business to the body of patentable subject matter in the 1998 State Street Bank & Trust Co. vs. Signature Financial Group Inc. case. Following that decision, inventors can tile to protect new business methods themselves, independent of the computer or Internet infrastructure, if any, supporting the business offering.

The Patent Office has set up a special group of examiners to double-check business method applications that have been approved in the normal examination process. The extra level of examination was established in response to criticism of patents granted for broad Internet business methods, such as the patent on Amazon's "one-click" purchase method. Now, according to the Patent Office, the percentage of business method applications it ultimately issues as patents is a bit less than the success rate for all patent applications.

Crossing the Line

Insurance companies may find themselves on the wrong end of a patent dispute, charged with infringement. Ignoring a competitor's patent can result in exposure to treble damages and attorney fees upon a finding of willful infringement. Treble charges are required under certain statutes. They are assessed after a judge or jury has determined the amount of the plaintiff's actual damages; the court may award up to three times that amount. A so-called "well-reasoned" opinion of counsel laying out the reasons a client's method or system is not covered by a patent can insulate a company from the extra damages. But if a patent does appear to cover current activities, steps should be taken to design around the patent or, if the subject matter is critical to the company's business plan, to negotiate a license. Sometimes a search of prior technology turns up a basis for invalidating a problem patent, particularly when the new information was not considered by the Patent Office in granting the patent.

Both offensive and defensive benefits of a strong patent portfolio have been described above. But a patent portfolio takes time to build. Top management must visibly support the patent program and give it high priority. Resources must be devoted to educating managers and employees, so they recognize innovations with patent potential before the chance to apply for protection is lost. And those creative people may be in sales or personnel as well as new product development. Business methods are patentable, and every employee who suggests how to improve the business is a potential inventor.

Insurance-Related Patents Issued and
Applications Published

Patent applicants will learn whether the patent examiner reviewing
their cases is willing to approve a patent and will have a chance to
submit a response amending their claims in the case of a rejection.

        No. of Documents

Year   Issued   Published

1995     7
1996    14
1997    14
1998    39
1999    47
2000    54
2001    29          66
2002    46         372

Note: Table made from bar graph.

Source: U.S. Patent and Trademark Office Online Database

Patents for insurance Purposes

Insurers and service providers have begun to patent the processes that
make their business more competitive.

Owner of Patent        U.S. Patent      Concept

General Electric       6,182,048        Underwriting System
Ins. Co. of N.A.       5,873,066        Underwriting System
Chubb Group of Cos.    6,301,563        Risk Evaluation System
State Farm             6,223,343        Administrative System
Hartford Fire          5,991,733        Collections System
The Merallis Co.       6,484,178        Claims Management
Raymond A. Joao        6,347,302        Underwriting System
Individual inventors   * 20030028404    Claims Management
Sony Corp.             * 200320184057   Policy Development

Owner of Patent        Purpose

General Electric       Calculates claim cost based by partitioning the
                       vehicle into several components, then correlates
                       failure rates and repair costs with vehicle
                       warranty information.
Ins. Co. of N.A.       Links each insured with the carrier's
                       underwriting guidelines by the insured's
                       Standard Industrial Classification code.
Chubb Group of Cos.    Compares a site to a database of known hazard
                       sites using geographic mapping systems and other
                       databases of risk information.
State Farm             Automated method and system for managing and
                       tracking revisions to applications for insurance
                       coverage.
Hartford Fire          Rule-based decision tools to maximize recovery
                       of receivables.
The Merallis Co.       Method of formatting input files into a common
                       file format. Not all claims specify an insurance
                       context.
Raymond A. Joao        Generate a premium and policy to cover excess
                       wear and tear on a leased vehicle. The algorithm
                       uses input data such as vehicle characteristics,
                       lease characteristics and the applicant's
                       driving, leasing and insurance history.
Individual inventors   Methods for outsourcing claims processing.
Sony Corp.             Generates product information in response to
                       design condition queries from a communications
                       network.

* Patent application

Active Patent Seekers

Number of patents issued
1993-2002.

Travelers/Citigroup   22
New York              12
MassMutual            40
ING                   11

Note: Table made from bar graph.

Source: U.S. Patent and Trademark Office
Online Database

Jeffrey E. Young is a registered patent attorney and a partner in the law firm of Alston & Bird LLP.