Lloyds Pushes Patent Insurance

Kiln, a Lloyds of London underwriter, has come up with a novel way for pharma companies to mitigate the risk of patent challenges: insurance. Kiln created a policy for a big pharma company covering a number of patents and trademarks the company considers essential for its future profitability.

"The exposures are enormous," explains a spokesman for the underwriter. "Patent challenges were treated very much as a commercial risk in the past. Insurance will give a cash value if the goodwill ceases to exist."

Kiln's director of underwriting, Robert Chase, is unaware of any other underwriter offering similar coverage, but says he would be very surprised if that type of insurance does not become a popular way for pharma companies to defray some of their risks. He adds that they have had inquiries from several other pharma companies since the policy was revealed.

Calculating the premium is complex, because of the difficulty in estimating future sales. Chase considers projected sales figures for the next two or three years and compares them with the company's track record in predicting future sales. Lawyers check both for proper construction and how many other patents are in the same field. Underwriters then assess the risk and calculate a premium.

The insurance pays out only if a legal challenge to the patent is successful and a court invalidates the patent. It does not cover any sales lost while the case is in progress.

If the threat to intellectual property can be insured against, what else might insurance cover? "A government might decide it will no longer respect intellectual property (IP) rights," explains Chase. "So, we could have government interference with IP rights written into the policy. Similarly, if a product or a company's reputation takes a knock in some way, then the resultant loss of revenues could be covered."

The ultimate insurance policy-coverage against unexpected withdrawals once a drug has been approved-is a possibility, says Chase, but the premiums would be very difficult for underwriters to calculate.