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Pirate raids and Troll attacks part 2 – protect your intellectual property
Euan McKenzie (@wonthappentome) is an insurance broker at Central Insurance Services, with over a decade’s experience of advising games developers on general insurance issues, including the liability and IP implications of development contracts.
When it comes to insuring against Intellectual Property (IP) disputes, the standard form of cover for games developers is a Professional Indemnity policy. But how much cover does it provide, and is it the best option for your business?
A “technology-based” Professional Indemnity (PI) policy should automatically include IP “Defence” cover. This means insurers pay the costs of defending allegations of IP infringement against the policyholder. Defence costs are paid, whether the claim is successful or not, which is valuable protection, as they can easily run into six figures.
This Defence cover also pays any damages awarded and the claimant’s legal costs if the claim is successful. However, as with all insurance policies, cover is subject to both conditions and exclusions, so it’s important to understand what these are and how they affect you.
The main “gaps” in this form of cover are:
1) While most forms of IP are covered, such as trademarks and copyright, patents are not, and;
2) The policy only deals with defending claims and does not include any cover for enforcement of the policyholder’s IP rights.
So what can you do to ensure you don’t fall through the “gaps” if your IP rights are challenged?
While not widely publicised, specialist IP policies are available which cover both “Patent Defence” and IP “Enforcement”. Cover can also be extended to deal with the cost of resolving disputes between parties to contracts that relate to the “exploitation” of any IP, such as licencing agreements.
With minimum premiums starting at £2,000-£5,000 for a basic policy, this type of cover is relatively expensive. However, premium costs can be put into some perspective by comparison with the revenues at stake and an average cost of patent litigation at around £400,000. There is also good news in that costs are slowly coming down, with a minimum £15,000 price tag not uncommon just a few years ago.
Increasingly this type of policy is being used as a means of protection by providing the policyholder with a “war chest” which, crucially, can help prevent negative precedents being set in IP disputes, based on the financial weakness of one of the parties concerned – a potential “killer-blow”.
The following list details the key aspects to look out for when arranging IP or any litigation-based insurance:
1. Contractual Liability for Third Party Costs – Indemnity to Principal
If a Publisher/Distributor receives allegations of IP infringement in relation to a Developer’s work, the Developer may be contractually obliged to pay any costs or damages they incur (whether or not the allegations stand). This can be an expensive process, particularly if it involves US Lawyers/Courts.
Because this kind of obligation to a principal/customer is purely contractual, insurers normally have to agree to provide the cover in advance, or the policy will not pay.
2. US/Canadian Court Actions
Global distribution channels and the size of the North American market, make it difficult to avoid, even if that was an aim.
Most insurance policies automatically exclude cover for sales to, or court actions in, the US/Canada (the main concern is the US but both countries are traditionally grouped together).
Cover must be agreed in advance with insurers and will involve additional cost – absolute minimum premiums of £500-1,000 are likely but are dependent on the Insurer and the exposure involved, so increases of 50-75% are not unusual.
The cover provided for North America involves much higher excesses (the amount the policyholder contributes to each claim). For the US/Canada, an increased excess, of anything between £5,000-£25,000 each and every claim, is the norm.
US/Canada cover will include further restrictions (see 3. below) and Developers should also watch out for any specific restrictions in relation to IP.
3. Indemnity Limit
The Insured normally selects the amount of cover they buy, using a number of considerations, including perception of the risk, budget and other issues such as what their peers do, or what a contract demands.
Consideration should be given to how much cover is bought, in particular whether a policy limit is “aggregate” (the maximum paid in any policy year) as well as “any one claim.” Additionally, is the limit inclusive of defence costs, or are they payable in addition.
As an example, a £250,000 policy limit may sound a lot but will not go far in terms of US court actions that could “bust” this figure in preliminary legal exchanges, let alone a court hearing and payment of damages.
Whether any allegation is considered serious or not, or is verbal and not written, Developers must advise their Insurers immediately, purely as a precaution.All policies have strict conditions regarding immediate notification and any delay can allow insurers to avoid paying all or part of a claim.
Likewise, it will be a policy condition that any strategic decisions or decisions on incurring costs must be made, or approved in advance, by insurers. Equally, no admission of liability should be made by the policyholder (regardless of the circumstances), in case it prejudices Insurers’ negotiations.
5. Contractual Requirements
Whatever a Developer’s own perception of the risks, or preferences relating to buying insurance, many contracts contain Insurance clauses.
These clauses will stipulate exactly the types and amounts of cover the Developer must hold and may also contain specific requirements in relation to IP.
6. Third Party Providers
Developers should check that their policy includes cover for claims that arise in relation to any third party content that has been sub contracted.
Most policies should provide this cover automatically but some don’t, and even where it is, it may be conditional upon checking that there are no restrictions in place (normally in the provider’s T&Cs) that prevent a full recovery against the provider, in the event of a claim arising.
There may also be a requirement to undertake checks on the adequacy of the provider’s insurance cover (normally that it meets a minimum level, or matches the Developer’s level of cover), or even that the Developer sub contracts with the third party providers on the same terms as their contract with the Publisher/Customer.
This is good practice regardless, but where it is a policy condition, it means the Developer’s insurance cover is at stake if it is not adhered to.
In relation to smaller, self-employed third party providers, it is common for some Developers to treat them as “ad hoc employees” and avoid any need for formal contracts, or insurance cover.
Insurers might be amenable to include them under the Developer’s policy but Developers should bear in mind that in doing so, they accept responsibility for claims arising from their work and need Insurers’ agreement in advance.
As a general rule, you should ensure that any third party provider holds their own insurance cover. Remember, the developer will be the first target of any claim because ultimately, it is their Game/their name on the contract.
Needless to say, it helps to have someone with experience act as an intermediary between you and your potential insurers. It. There is no convenient “one-size-fits-all” product which will guarantee you full protection; an experienced, independent broker can work on your behalf to ensure you get the advice you need, as well as the most cost-effective solution to suit your specific situation., Regardless of the outcome, lengthy IP disputes can do irreversible damage to your business, why take the risk?