Guarding Against The Unseen

Guarding against intangible risks — reputation risk and the protection of intellectual property, for example — served as a hot topic at the 2009 Risk and Insurance Management Society Conference in Orlando, Florida.

Technology is evolving and affecting communication at an alarming pace, speakers at the conference said. And if risk managers fail to keep up, they could be facing multi-million dollar lawsuits, damaged brands and faltering stock values. The stakes are high with these types of risks, but there is rarely a clear-cut risk transfer program to help insure against these losses, conference panelists said.

PROTECTING IDEAS

Risk managers must increasingly grapple with finding coverage for their organizations’ intellectual property (IP) in the absence of an insurance product specifically dedicated to IP infringement, said Chris Casper, director of management, liability and surety at Tave Risk Management.

The importance of IP assets has increased significantly over the past 30 years, he said. Less than 25% of companies’ assets were IP-related in 1975, but that number skyrocketed to between 70% and 80% in 2008.

“What does that mean?” said Casper. “It means companies are generating more and more of their revenue through IP. It also means companies are much more likely to be aggressive in the protection of their IP, including bringing suit against those that infringe upon their assets.”

Patent claims significantly outpaced shareholder class action claims in the United States in 2008, he noted. Last year, 1,448 patent claims were brought forth in the United States, compared to only 210 shareholder claims (which marked a 40-year high).

“The frequency for patent claims far outpaces the frequency for D&O claims, but if you look at the D&O space, there is an entire industry based around managing the liability of that area,” Casper said. “The insurance community has yet to embrace, on a relative basis, the IP world.”

Although no insurance product is specifically dedicated to the protection of IP, risk managers can explore four different types of coverage to protect their IP from infringement (and against accusations that their organization is infringing on another’s IP).

Robert Fletcher, president and CEO of Intellectual Property Insurance Services Corporation, listed the coverage options as follows:

• Abatement: a policy that pays outside legal expenses incurred to enforce IP against alleged infringers;

• Defence insurance: a policy that pays outside legal expenses incurred to defend against charges of IP infringement;

• Multi-peril: a policy providing first-party coverage for loss of value because of an adverse consequence related to the loss of an IP infringement lawsuit; and

• Asset-backed IP insurance: A policy that allows the owner to use his or her intellectual property as collateral for a loan.

Only the last of the options require a valuation of the patent, Fletcher said. The first three coverage options require “the amount in controversy” in order for the IP to be underwritten.

The amount in controversy is the sum of the patent holder’s recovery of investment, the potential loss of market share and the increased risk of peril because of the increased litigation factor (the more your product is out on the market, the greater the chance of IP infringement).

MANAGING REPUTATION

The speed of communication and news distribution has changed dramatically in the past few years, and risk managers need to increase the speed with which they react to a reputation-damaging event by reaching out to the media immediately, said panellist Richard Levick, president and CEO of Levick Strategic Communications.

In order to better guard against public relations disasters and reputation risk in the Internet age, risk managers need to familiarize themselves with the “high-authority bloggers” that track their industries, Levick said. He defined a high-authority blogger as “someone who blogs, but has someone with credibility that links to them.”

Examples include, thedeal.com,which is linked to the New York Times, or the HuffingtonPost.com.

“They are the early-warning signs [of a public relations issue],” Levick said, referring to the well-connected bloggers. “And they are also the people who tell journalists what stories to cover.”

Risk managers and their organizations can no longer rely solely on newspapers or television news networks to tell them whether or not they have a public relations problem on their hands within the first 24 hours of a potentially damaging event, he said.

Levick pointed to a recent incident at a pizza chain, in which employees videotaped one another tampering with the food and then posted the video on their blogs. Within the first 24 hours of the event, only 7,000 people had seen the blog. But over the next 24 hours, more than 250,000 people watched the video, severely damaging the pizza chain’s reputation. Millions of other viewers have since seen the posted video.

“The speed at which communication now works is far faster than our ability to comprehend or deal with,” Levick said. “The race between newspaper and television news and the blogosphere is over. Ignore the blogosphere at your peril.”

The traditional response to a crisis has been to “duck and run” Levick said. But that approach will only lead to more damage, he stressed.

During the peanut crisis earlier this year, in which the peanuts being processed at a Georgia plant were tainted with salmonella, a viral video of sick grandmothers and children found its way onto the Internet, Levick said.

“Do you know how long it took to put that video up [from the point in time when the crisis broke]? Less than 24 hours,” he said. “Do you know who put it up? Two plaintiff lawyers in California.”

By ducking and running, organizations are “guaranteed to lose,” he stressed. “Your stock price will go down, your brand will be marred and there will be a higher likelihood of class action litigation.”

Levick said every crisis is a Shakespearean tragedy of sorts. “There is a hero and a villain,” he said. “Those are the only two roles.”The party that moves first gets to choose the role it plays, he added. “The plaintiff bar and the regulators are already moving at a speed in which they are anticipating crises, so that means they’re already taking the hero role.”

By communicating very quickly with these groups during the early stage of a crisis, and by cooperating with regulators, an organization can become part of the solution, Levick said. The company at the centre of a public relations storm doesn’t necessarily have to assume the role of the villain. “One of the things you can do in these situations is cooperate, cooperate, cooperate [with the regulator]. If you cooperate, then [the regulators] will make you a part of the solution. You do not want them as an adversary.”

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High-authority bloggers “are the early warning signs [of a public relations issue],” Richard Levick said. “And they are also the people who tell journalists what stories to cover… Ignore the blogosphere at your peril.”