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IP Due Diligence Checklist: What to Expect When You Shop for IP Insurance

Jonathan Selby - Founder Shield
Jonathan Selby

General Manager

In today’s digital era, some of the most valuable assets are intangible. Take the social media app TikTok. It has overtaken Facebook and Instagram in valuation, with many saying its scarily accurate algorithm is what makes it so addictive. Were they to sell their patented algorithm or be hacked, their most prized business element would be gone. This is where intellectual property (IP) insurance comes in to protect invaluable innovations you either created or purchased. Such coverage is essential in the tech space, helping high-growth companies with legal fees and defense and enforcement insurance in case they face infringement claims or are infringed upon.

What Is IP Due Diligence?

IP insurance covers a company’s intangible assets from being stolen and supports the policyholder when facing IP lawsuits. These assets can be trademarks, trade secrets, copyrights and patents.

Outstanding enterprises often begin with brilliant ideas that founders bring to life. Once they launch and succeed, others might want to take the same idea and run with it. IP insurance protects such scenarios from happening, letting creators sleep well at night knowing their asset is in safe hands.

IP insurance differs from any other coverage, as it deals with a company’s more elusive products, like a brand name. This makes the due diligence process more complex and time-consuming as underwriters must assess the risks and threats an intangible asset can pose for a policyholder.

Some of the boxes a business must tick during due diligence include the relevance of the IP to their enterprise, its quantity and quality, the IP creation process and any chain of ownership to prove its lawful ownership. These and other requirements ensure the asset is currently safe with them, no one is infringing upon it at the moment and it is worth IP insurance coverage.

Why Is IP Due Diligence Important in the IP Insurance Process?

While IP due diligence might seem like any regular procedure to safeguard assets, license or purchase it from someone else, the reality is it transcends other processes. This due diligence will inform how much an asset is truly worth, its validity and if it’s at risk of infringement. Because original creations are highly valuable to creators and buyers, companies will want to know such information from an objective assessment.

Just imagine how the company behind the Profit Pod must have felt back in 2006 when they received a copyright warning from Apple claiming they were infringing upon the iPod trademark and design. From the perspective of IP insurance, Mach 5 Products, the creator of the Profit Pod, could’ve avoided such a risk had they gone through IP due diligence.

Apple’s case might’ve been quite evident, but due diligence can uncover more nuanced risks and threats for an asset. For example, access risk stemming from the number of people in a company that can get their hands on the IP, reputational risk a brand might face, poor IP terms and conditions previously agreed on with licensees or other third parties and poor trade secret management, just to name a few.

By deeply analyzing the state of an IP, insurers can also determine exactly what coverage it needs so it gets the most protection based on its vulnerabilities.

Key Steps in IP Due Diligence When Shopping for IP Insurance

So, when the time comes to insure intangible assets, businesses must make sure to cross all items on this IP due diligence checklist.

IP Asset Identification

Engineers, developers or designers might create an IP asset for their company without even knowing it—some professionals are more trained than others when it comes to IP generation. It’s vital to review company activities to ascertain every IP a policyholder might hold during due diligence, so they’re aware of exactly what needs protecting. 

After listing every asset, companies or an IP counsel must identify each of their importance and prioritize accordingly. For example, a brand name and an algorithm might mean more to a tech company than a speech they gave (unless it had “I Have a Dream” levels of influence).

Assessment of IP Value and Strength

IP valuations can be murky in today’s digital world, but there are two stepping stones to knowing the financial value of an asset: exclusivity and future benefits. The originality of the intangible product represents a big chunk of its worth, which policyholders can measure by the economic benefit it has brought them or any product using the IP. Determining future benefits entails the exploitation potential of an asset, buying or licensing interest from third parties and the probability of its replication in the future.

Likewise, exclusivity and the future benefits a company can yield from its product will determine the strength of making IP claims, which they must also consider.

Review of Existing IP Agreements and Licenses

If a business is insuring its assets after tying them to third parties or purchasing them from someone else, it’s best to thoroughly review the conditions of each agreement to know what everyone is entitled to. This includes any restrictions in the contract and rights and obligations on both sides.

Because a product might not just belong to a single person, policyholders must also assess the terms of licenses and other agreements to define any risks of infringement from either party.

Assessing External Risks

Now that you’re aware of your IP’s worth, relevance and ties to other individuals or companies, it’s essential to evaluate your industry competitors to uncover potential infringements from your end or theirs. It’s best to avoid being another Profit Pod and go out of business or rethink your entire product.

Transparency is also king when insuring an asset, so disclosing any previous IP disputes and whether there are any pending claims the creator or others made about the IP is critical for due diligence.

Ensuring Compliance With IP Laws

Lastly, due diligence calls for proper IP rights to the policyholder. The very first procedure a  product must undergo upon creation is registration. Likewise, make sure registrations are updated and maintained to current laws. This way, insurers know an asset is rightfully owned by a company the day they wish to seek IP protection.

Tips for Choosing the Right IP Insurance Policy

Not all IP insurance policies are made equal. Each insurance company, just like any other business, counts with intricacies or subjectivities in the way they do things, specializing in specific markets and insuring companies of different sizes. As a result, not all insurers are suitable for a company’s IP protection needs.

  1. Based on the IP due diligence, it will be easier to evaluate an insurer’s policy limits, deductibles and coverage scope according to an IP’s worth and the industry it impacts. This way, policyholders will know if insurance companies are able to properly protect their assets or if they should look elsewhere for more suitable terms.
  2. Reading the fine print also involves knowing what’s not there. Check for vital exclusions in the initial quote to reach an agreement with insurers or decide to walk away. Likewise, carefully go through every condition to determine whether or not they’ll keep your IP safe from infringement or your company covered in case of claims.
  3. Finally, it’s best to keep your ducks in a row to check registration records and other IP management documents seamlessly. Likewise, seeking IP counsel through specialized attorneys or other professionals is important when reviewing an initial quote—they’re the experts, after all. 

While the nature of digital assets makes IP insurance a more extensive and complex process than other insurance procedures, policyholders must keep in mind that the more thorough the due diligence, the more comprehensive coverage they can receive. IP assets are some of today’s companies’ most valued products, and seeking the right coverage from suitable insurers will give them peace of mind in such a competitive tech landscape.

Founder Shield offers unmatched expertise in risk management, with insurance brokers closely following industry trends to protect your IP assets based on modern needs. Talk to our specialists in a few easy steps so we can get started on tailoring the right coverage for your IP assets.

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