The Journal of New England Technology. As see in Mass High Tech, Volume 22, Issue 11, March 15-24 2004

Licensing of technology can be one of the most lucrative cost centers for technology and other enterprises. Prudent to remember, however, is that it is a cost center with little or no insurance protection when things go awry. Executives are wise to consider the risk elements of licensing ventures with their lawyers, accountants and insurance professionals before embarking on licensing.

Even specialty technology insurers have long carried the standard intellectual property exclusions on their forms. Let's examine those areas of risk and exposure with respect to intellectual property and offer advice on minimizing both.

Indemnification Most commercial technology contracts carry a clause: "LittleCo hereby indemnifies and holds harmless and agrees to defend BigCo for all claims, demands, charges, suits, proceedings, damages, direct or consequential ... for any and all injury or damage ... intellectual property infringement, including but not limited to trade mark, copyright, patents, invasion of privacy, plagiarism, unfair competition ..."

Your insurance agent explains first and foremost that this BigCo-LittleCo contract is not your insurer's contract. Indemnification is a term associated with a financial guarantee to provide legal defense for a claim. Do not undertake indemnification casually without attempts to transfer this risk to your insurer.

Your insurer may be able to accommodate the general liability areas and even errors and omissions liability indemnification clauses. Vastly more difficult are the intellectual property indemnification clauses.

What may be covered to some extent:

• Trademarked or service-marked titles or slogans

• Copyrighted advertising materials

What coverage is severely limited:

• Privacy, now limited to "private occupancy" (eliminating Internet exposures)

• Unfair competition (limited within trademark infringement matters).

What is excluded:

• Patent, copyright or trademark infringement

• Plagiarism

• "Broad contractual"

• Most Internet liability exposures.

So what to do? Examining both sides of licensing - incoming and outgoing - will clarify your respective strategies.

Risk management and minimization

Licensing your technology to others: If you are providing opportunities for others to license your technology for their use, it's likely you will be expected to promise that your intellectual property does not infringe. You will also be expected to indemnify and hold your licensing customers harmless from any liability should your IP be found to infringe.

Such licensing terms are customary and standard. Patent infringement insurance coverage is available but requires a legal opinion letter for each patent and tens of thousands of dollars in premium costs per patent. While some markets provide sources of "insurance opinion letters," software IP remains an extremely difficult line to place.

Given the condition and costs of transferring your intellectual property exposures to an insurer, be careful not to promise under contract that you will carry insurance for any IP warranty or indemnification. To make such a promise and not secure coverage would place you in the unenviable position of being in violation of your licensing contract.

Licensing another company's technology: When you are licensing someone else's IP, the contract terms will most likely contain a warranty that the IP does not infringe. In addition, expect indemnification provisions to your benefit. Be sure this is the case. Ask your legal counsel to ascertain how likely you will be to find yourself in an infringement suit due to innocently licensed IP. What are their indemnification provisions worth and what is their capacity to defend you?

Ask your insurance agent to annotate your IP license contract for "covered" and "uncovered" items. Remember that patent and copyright infringement coverage is excluded, so related indemnification promises do not extend to your insurer.

For those contract areas where coverage is afforded and coverage limits are specified, verify adequacy. An experienced agent will advise you of where contract terms are confusing, those that may be impossible to secure and those areas that should be taken out of the contract altogether.

In the midst of all of the above, don't forget that your website also carries a number of intellectual property exposures. Websites are publications, and as a publisher you are exposed to claims of infringement.

Your website is publishing globally, and therefore you have a planetary opportunity to offend. Do not appropriate logos or lift text from any sources but your own. The IP content of your website is not ordinarily covered by your standard insurance program. Specialty coverage policies have been designed to cover those web exposures.

Now that you have identified your business risks under the contract, what is covered, what is not covered, watch those areas where you are "bare" insurance-wise. Be extremely diligent with unprotected exposures like IP infringement. Supervise subcontractors thoroughly and pass as much of your exposure to them as possible.

Remember, your insurance agent, like your accountant and attorney, is part of your risk management team. Ask them to help you minimize your risks.