 |
 |
 |
|
Risk Managers' Forum Be smart with intellectual property exposures Lack of coverage can affect both customer and insurance professional By Richard G. Rudolph, Ph.D., CPCU, ARM Two important assets of an organization are rarely recognized and recorded on its financial statements: (1) the value of its human assets, and (2) the value of its intellectual properties. In simple terms, intellectual property is a product of the human intellect that has commercial value. The commercial value of intellectual property comes from the ability of its owner to control its use. Intellectual property accounts for approximately 80% of quantifiable business assets yet is rarely addressed beyond the advertising liability coverage provided in the personal injury definition in a general liability policy. This lack of coverage may prove to be a disaster for you, the insurance professional, as well as for your customer. For all businesses, public or private, profit or nonprofit, failure to address protection for patents, trademarks, service marks, trade secrets, and the like may result in soaring legal expense, catastrophic losses of revenue, and even business failure. For publicly traded companies subject to Sarbanes-Oxley, the existence of intellectual properties creates a new executive risk, as the failure to report on the lack of insurance or imperilment of assets or earnings is now a criminal act that exposes management to criminal and civil liability. (Sarbanes-Oxley focuses on disclosure of public information and establishes criminal liability for a variety of governance misdeeds.) Failure to address this exposure with any of your clients can lead to trouble for you. Because of well publicized abuses in corporate governance, there is increased attention to accurate reporting of a company’s financial status and exposures to liability and existing litigation. Lack of insurance or underinsurance has obvious implications for the valuation of corporate assets as uninsured assets may lose some or all of their value. Uninsured liability exposures can similarly diminish corporate assets. The importance of this uninsured or underinsured corporate asset exposure is highlighted in two provisions of the Sarbanes-Oxley Act. First provision Item 101 (c)(1)(iv) of Regulation S-K states that management must report the importance in the industry segment of intellectual assets. The organization must evaluate and disclose information such as the duration and effect of all patents, trademarks, licenses, franchises, and concessions held by the company, but only to the extent that the holding is “material.” Materiality is a question of fact that is determined by the courts, with some guidance offered by the Securities and Exchange Commission. In one important case1, the Supreme Court offered a two-pronged test of materiality: 1. Is there a substantial likelihood that a reasonable shareholder would consider the information important? 2. Is there a substantial likelihood that the reasonable shareholder would have viewed the disclosure of the information to substantially alter the totality of the information made available? In another case2, the Supreme Court included a probability of occurrence test in the decision that insurance professionals would translate as “expected loss” or “probable maximum loss.” While both of these decisions were rendered prior to 1990, in the post-Enron/WorldCom/Tyco world, one can assume materiality might be even more generously defined today and in the future. Second provision Another provision of Sarbanes-Oxley, Item 303, requires the organization’s management to report all legal proceedings relating to intellectual property, whether covered by any type of insurance or not. We know from reports of written premium on intellectual property that most insureds do not purchase dedicated intellectual property coverage of any type. Furthermore, the commercial general liability policy’s personal injury/advertising liability provisions offer only a very narrow scope of intellectual property coverage. Thus, the insurance professional must assume that any legal proceedings relating to his or her customer’s intellectual property are likely to be uninsured, and legal expenses alone, as you might imagine, could be enormous. Insurance professionals have long recognized the importance of informing customers about the potential consequences of having uninsured exposures, regarding both the potential harm to the customer as well as the possibility of losing a valued customer, or worse, becoming a defendant in an errors and omissions suit. As part of an annual stewardship review and the obtaining of quotations for renewal of the insurance program, the insurance professional should consider asking such questions as these: 1. What kinds of intellectual property does your organization have? 2. What is the economic value of your intellectual property? 3. How do you identify significant changes in intellectual property? 4. Have you established appro-priate policies and procedures to assist in identifying and evaluating any changes in intellectual property? 5. Are you aware of any infringe-ments on your intellectual property? 6. Have you determined the potential impact of infringement on your intellectual property? 7. Have you evaluated the potential value of recovery from these infringe-ments and how any recovery would likely affect the firm? 8. Are you aware of any new issues that might change the economic value of your intellectual property? 9. Are you aware of any pending or potential legal action that might affect the economic value of your intellectual property? While the answers to the above questions may be difficult to obtain, these are some of the very same questions needed to obtain a quotation for coverage for intellectual property from the insurance market. Even if the customer does not decide to request a quotation for intellectual property coverage, making the customer aware of that exposure is important. The existing market for coverage is extremely limited and pricey. First-party coverage, a type of business income and extra expense insurance, is rare and costly. Abatement coverage, or “attack” funds provided to pursue claims against IP infringers, is likewise rare and costly. Third-party defense coverage is the most widely available type of insurance. After a spate of hurricanes and other natural catastrophes and the constant threat of terrorist acts, more organizations are establishing disaster plans, but generally only as these plans relate to physical perils. Since intellectual property losses are not related to physical perils, disaster planning for these losses is not widespread. Measures for intellectual property exposures tend to be reactive, not proactive. In addition to advising your customers to consider purchasing intellectual property coverage, you can offer the valuable service of helping your customers identify and quantify their intellectual property exposures and develop appropriate measures to handle the exposure. Since intellectual property insurance is costly with relatively low limits, standard coverage is inadequately narrow, and reliance on insurance alone is risky. You can provide valuable assistance to your customer by helping him or her plan for the uninsured portion of the potential loss. * 1 TSC Industries, Inc. v. Northway, Inc. at 426 U.S. 438 (1976). The author |
|
|||||||||||||
| ||||||||||||||
