Companies that take their competitors to court to assert their intellectual property rights have a new weapon in their legal arsenal.

A Houston patent attorney has developed an insurance program underwritten at Lloyd's of London to help finance the cost of lawsuits alleging patent, trademark or copyright infringement.

The program is only the second of its kind to be offered in the United States. Intellectual Property Insurance Services Corp., a Louisville, Ky.-based managing general agent, has been the sole market for such coverage since 1989.

Unlike the existing IPISC policy, which targeted mainly mom-and-pop patent holders, the new Lloyd's policy is directed toward growing companies with $5 million to $200 million in annual revenues. Both are claims-made policies.

"The greatest risk a patent owner has is the cost of enforcement," said Joby Hughes, president of Litigation Risk Management Inc. in Houston. Mr. Hughes developed the Lloyd's program.

"There are over 5,000 companies in the U.S. that spend between $50,000 and $100,000 a month in patent litigation costs," he estimated.

"And when you get these huge corporations fighting over market share, it can really drive up litigation costs," he said.

"Intellectual property, specifically patent litigation, has been known to be a very expensive process," said Donald J. Fancher, director of litigation services for Deloitte & Touche L.L.P. in Houston.

Plaintiffs' legal fees in patent infringement cases currently average $1.2 million, Mr. Fancher said, citing statistics from the American Intellectual Property Law Assn., which is based in Arlington, Va.

In some areas of the country, such as California's Silicon Valley, these fees often top $2 million, according to Mr. Hughes.

And the cost of enforcement has risen due to insurance coverage litigation victories providing greater resources for defendants, one attorney noted.

More and more defendants' lawyers are seeking defense cost coverage under the commercial general liability insurance policy, said David Gauntlett, an attorney specializing in intellectual property and insurance coverage at Irvine, Calif.-based Gauntlett & Associates. Mr. Gauntlett represents plaintiffs in intellectual property disputes.

Recent court rulings granting defense cost coverage for patent and trademark infringement claims under the advertising injury clause of CGL policies have "raised the ante" in such disputes, thus contributing to the need for patent enforcement insurance, he said.

Over the past several years, insurers also have developed specific contracts to provide coverage for intellectual property exposures, but these policies generally provide only defense and/or indemnification.

Mr. Gauntlett thinks the emergence of patent enforcement insurance will help victims of corporate cribbing by leveling the litigation playing field.

"This is a good program for people who like to see the law applied appropriately and not be dependent on its economic merits," Mr. Gauntlett said.

Many large companies consider the costs associated with infringing on a smaller competitor's patent a business expense, Mr. Gauntlett said. "Their general counsel is asked to do a cost-benefit analysis" that includes the likelihood of a suit and the associated defense costs before deciding whether to infringe on another company's patent rights, he said.

With insurance coverage available, it is easier for smaller companies to take the offensive to protect their patents. "When you obtain a patent, you essentially get a right to sue. So these policies provide the financing to enforce that right," Mr. Gauntlett said.

Family-owned King Safety Products in St. Louis is just one example of a small company that might not have been able to assert its intellectual property rights if not for the availability of enforcement insurance.

In an infringement suit filed last year against Ideal Industries Inc. of Sycamore, Ill., King alleges that the larger manufacturer is infringing its 1992 patent for a silicone-filled waterproof connector used in electrical wiring.

But King would not have been able to actively pursue this enforcement case if the company hadn't purchased "infringement abatement insurance" from IPISC, according to L. Herbert King Jr., president and chief executive officer.

"Most inventors are unprepared to handle that kind of litigation expense," said Mr. King. The insurance "gives inventors and patent-holders who are trying to bring a product to market the fuel to combat an attack on their patents."

The case still is pending in U.S. District Court in St. Louis.

IPISC's policy, underwritten by Homestead Insurance Co. of Secaucus, N.J., pays 75% of the company's legal costs up to limits of $100,000, $250,000 or $500,000, explained William L. Ritter, a senior account representative for IPISC.

The average premium is just $3,500 for $500,000 in coverage for a single patent.

The Lloyd's policy, by comparison, is much more expensive, with the premium averaging $25,000 for $1 million in coverage.

In comparing the two policies, coverage experts say buyers essentially get what they pay for.

For example, the IPISC insurance policy covers just one patent, while the Lloyd's policy covers a family of related patents that can number in the hundreds, explained Emily Q. Freeman, a vp at Sedgwick James Inc. in Portland, Ore.

And while the IPISC policy pays 75% of costs up to policy limits, the Lloyd's policy provides 80% coinsurance.

Both policies require the policyholder to pay for an independent analysis of its patent rights. But while Lloyd's requires the review up-front before coverage is bound, the IPISC policy doesn't require the review until a claim is filed. As a result, some IPISC policyholders may find they have no coverage at the time they pursue a patent suit, critics of its coverage point out.

But Mr. Ritter of IPISC said a later review is more valuable because it is more up to date.

The IPISC policy also includes a subrogation clause permitting the MGA to seek damages from the attorney who arranged the policyholder's patent, provided the patent turns out to be invalid.

Both underwriters also offer-for an additional premium-extended reporting period coverage for claims that start during the policy period but extend beyond it.

Attorney Mr. Gauntlett used a car analogy to compare the two policies: "Intellectual Property is selling a Hyundai; Lloyd's is selling a Chevy."

And if and when American International Group Inc. comes out with a policy, "it will be a Cadillac," he predicted.

The premium difference reflects the quality of the underwriting, agreed Sedgwick's Ms. Freeman, who said she liked the "security" of the Lloyd's syndicates involved.

While IPISC's policy is underwritten by Homestead, a surplus lines insurer rated B++ by A.M. Best Co., the Lloyd's policy is led by Andrew Beasley, a leading syndicate manager, and Cottrell & MacGuire, which writes errors and omissions coverage for members of the AIPLA. D.P. Mann Underwriting Agency Ltd. is the third underwriter on the Lloyd's slip.

The Lloyd's slip also can provide higher limits on a manuscript basis, Ms. Freeman pointed out.

And the underwriters are even willing to write "known infringement" coverage, as opposed to "unknown infringement" coverage, Mr. Hughes added.

"It's about triple the cost, but the house is on fire," he quipped.

Some coverage experts, though, question the value of either policy, as both policies require victorious policyholders to reimburse the insurer's legal fees, plus a bonus of 10% to 40%-even if there is no monetary award.

"This is an investment, not an insurance policy," said Ernest Beffel, a partner with Hancock, Rothert & Bunshoft in San Francisco.

It's almost a sure bet the underwriters will make money, because policy terms provide they get their money back plus a bonus if they prevail in enforcing a patent in court, he pointed out.

Mr. Beffel is handling a coverage suit against Homestead on behalf of one of his clients who had purchased an infringement abatement policy from IPISC in 1993.

Homestead approved Hancock, Rothert as patent counsel for the client but balked at paying the firm's fees after the litigation started. Eventually, Homestead paid the legal fees. The client ultimately settled the underlying patent suit for an undisclosed sum.

Meanwhile, Homestead is trying to recover part of the award, claiming that as the patent insurer it is entitled to recoup legal costs plus a 25% bonus.

The client is resisting repaying the legal fees to Homestead, insisting the insurer had acted in bad faith by delaying claims payment during the litigation. About $60,000 is in dispute, according to Mr. Beffel.

The coverage case is pending in San Francisco Superior Court.

Litigation Risk Management's Mr. Hughes maintains the underwriters should share in the spoils of victory because they are taking a risk that a patent cannot be enforced.

While 75% of the patent enforcement suits settled before trial are resolved in favor of the plaintiff, there's still a 25% chance the patent-holder will lose, he said.

And, in some cases, the pre-binding analysis can serve as a risk management tool by thoroughly researching the patent's validity and ownership, he added.