What Every Technology Company Should Know About Insurance Coverage

November 29, 1999

Introduction
There are many different types of insurance coverages that businesses typically carry in their insurance portfolio - workers compensation, property, health, business auto, and commercial general liability ("CGL"). As its name suggests, the general liability policy covers claims for liability to third parties, as opposed to, for example, property coverage for damage to the company’s property. The general liability policy usually provides two important benefits to the insured.

  • Indemnity – The general liability policy provides coverage for "occurrences" or "accidents", subject to certain stated exclusions. It will provide payment for sums that the insured becomes "legally obligated to pay" -- i.e. damages or settlements as a result of a lawsuit or a dispute concerning a covered claim.
     
  • Defense – The general liability policy usually contains a duty to defend. This benefit is often as important as the indemnity obligation because it requires the insurance carrier to provide the insured with a defense of a claim. Defense of a lawsuit, such as a complex intellectual property dispute, can be very expensive and last many years.

Unless your company has obtained insurance coverage for specific intellectual property coverage issues (such as patent infringement insurance), insurance coverage for intellectual property issues is typically found in the "advertising injury" section of a standard general liability policy.

Technology companies usually are confronted with claims for:

  • patent infringement,
     
  • copyright infringement,
     
  • trade dress and trade mark infringement, or
     
  • unfair competition, among other possible claims.

Some of these claims may be covered, depending on the form of the policy which your company has. There are two main policy "forms", the Insurance Services Office 1976 endorsement and the ISO 1986 form, that have been in use for the last twenty years. There are some significant differences between the two forms.

What Is Covered?

You should keep in mind that coverage may vary from policy to policy, and from jurisdiction to jurisdiction, depending upon the interpretation by courts in your area. The following are some generalizations of coverage under the general liability policy. You should consult with counsel to determine the construction given by courts in your jurisdiction.

  • Patent Infringement – Although there is a split of authority among the courts, the majority view seems to be that patent infringement is not covered under the general liability policy because the infringement does not occur in the course of "advertising" activities.
     
  • Unfair Competition – The majority view is that claims for common law unfair competition are covered under the 1976 endorsement form.
     
  • Trademark and Trade Dress Infringement – The majority view is that trademark and trade dress infringement are covered under the 1986 general liability form because the infringement constitutes a "misappropriation of advertising ideas or style of doing business". This type of infringement by its very nature occurs in the course of "advertising" activities.

The Policyholder’s Obligations

The policy places certain obligations on the policyholder in order for coverage to apply. There are two important obligations, among others. First, the policyholder must give timely notice of any claim to the carrier. Therefore, if your company receives a demand letter or is served with a law suit, you should forward that information to your broker or carrier immediately. Second, the policy requires that the insured cooperate with the carrier in the defense of the suit. This means participating in the pre-trial development, defense, settlement negotiations or possible trial of the suit. If the policyholder fails to cooperate, he may lose coverage.

Defense of the Claim

As mentioned, one of the benefits of the general liability policy is the defense which the carrier provides for covered claims. Frequently, a company will be confronted with both covered and uncovered claims. In that case, the carrier is generally required to defend all of the claims, both covered and uncovered. However, the carrier may issue a "reservation of rights" . This is a letter that states that the carrier believes that some or all of the claims may not be covered, but is providing the policyholder with a defense anyway. The carrier "reserves its rights" to later dispute or deny coverage. The policyholder may accept or challenge this "qualified" or "conditional" defense. Space does not permit a detailed discussion of the policyholder’s options at this juncture.

Who Chooses Defense Counsel?

Carriers prefer to assign the defense of the claim to counsel whom they select. The carrier usually has more experience with the approved counsel and has probably also negotiated a favorable fee arrangement . On the other hand, the policyholder may wish to select counsel. The attorney selected by the carrier may not have expertise in the policyholder’s industry or product. However, if the carrier issues a reservation of rights, the policyholder may have the right to select counsel of its choice and require the carrier to pay reasonable fees for the counsel selected by the policyholder. In addition, many policyholders have negotiated the right to select counsel with their carriers. This is usually done up-front when the policy is procured and the terms of the policy are negotiated. This is an important policy term that you should discuss with your counsel or broker.

Technology Firm Check List

There are a few things that any technology firm might want to do:

  • Check to see what kind of coverage you have. Do you have a general liability policy?
     
  • Do you have or need additional specialized coverage, such as patent infringement coverage?
     
  • If you have received a demand or notice of claim, or have been served with a lawsuit, have you given your broker or carrier prompt notice of all claims ?
     
  • Do you have a procedure in your company to make sure that any claim or lawsuit is immediately delivered to your risk manager or other designated person?
     
  • Does your policy allow you to select your own counsel to defend your company? If not, you may want to discuss this issue with your broker before renewal of your policy.

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