LEGAL PROTECTION INSURANCE THE PROBLEMS TO BE SOLVED Jean-Marie Rutsaert (B) Comité Européen des Assurances BRIEF OVERVIEW OF LEGAL PROTECTION INSURANCE IN EUROPE On most European insurance markets (with the notable exception of the German and Swiss markets) it is only relatively recently that the legal protection branch has operated independently of the other branches of non-life insurance (mainly motor insurance and liability insurance). For the European Union, the Directive regulating this category of insurance dates only from 1987. Some 1000 companies of which only a hundred or so are specialised operate in the legal protection field, and their total annual receipts in this branch can be put at around 4 billion euro (1998 figure), which means average receipts of 4 million euro per company. This figure of 4 billion euro should be seen in relation to an overall turnover on non-life insurance in Europe in the same year 1998 of the order of 245 billion euro, including nearly 80 billion for motor insurance alone. Furthermore, between 90% and 95% of this amount, depending on the country, is made up of revenue from policies for motoring related legal protection and private legal protection, while only a very limited portion of less than 400 million euro (an average of 400,000 euro per company) represented premiums collected for providing cover to businesses. These features explain the scantiness of the financial resources available, on average, to insurers operating in this branch, particularly as regards legal expenses 357
insurance for businesses. Lastly, it should be pointed out that the German market is the largest in Europe, as it alone represents about half the total revenue in Europe, with turnover of which 90% is similarly derived from underwriting the risks of individuals (motoring and personal liability). SPECIFIC PROBLEMS RAISED BY LEGAL PROTECTION INSURANCE FOR INTELLECTUAL PROPERTY Need to Cover Large Amounts More than in any other actionable sector of activity, industrial property is a field in which preserving the interests of the holder of a right as plaintiff or as defendant costs a great deal. Out-of-court or judicial proceedings in this field require difficult searches or investigations, the use of experts, recourse to various procedures for bailiffs' reports and seizures, and all these measures are lengthy and costly. As other speakers have already said, use also has to be made of highly specialised consultants, whose fees are high. Good coverage in legal protection insurance thus has to involve insured amounts that are higher than those generally applied in this branch and are difficult to reconcile with the limited spread of applicants and the small amounts collected in premiums in this particular area. Geographical Scope of Coverage The problem gets more complicated when, to meet the policyholder s needs, cover has to be extended to a number of countries, since the insurer then has to have the means available of providing his policyholder with proper assistance in each of the countries concerned and of calling on a network of specialists in these countries. This is another aggravating factor in the cost of claims which further increases the need for the amounts insured to be large. This aggravating effect is particularly noticeable when the cover has to apply on the territory of the United States. Difficulty of Assessing the Risk Apart from the fact that industrial property law is a matter for specialists which 358
a company offering legal protection insurance does not generally have on its permanent staff a precise assessment of the risk to be covered more often than not requires advanced and precise technical knowledge of the sector to which this insurance is to apply. This means that, before any contract is signed, in order to decide on the coverage to be given the insurer has to obtain a technical expert s opinion which will provide information on the reality of the risk to be covered and help him often empirically to set the premium. Endemic Antiselection The experience of insurers who have been bold enough to offer legal protection policies shows that this category of insurance more than any other is liable to suffer from what insurers call `antiselection', which means that insurance cover is sought only by those who carry a relatively high risk: a) those who have reason to fear that their use of an industrial property right might be contested and who expect to have to bear legal costs to defend themselves or b) those who hold an industrial property right which is regularly violated, e.g. the holder of a well known trademark or patent who is regularly the victim of counterfeiting and expects to have to take legal action as the plaintiff. The natural result of this is that more than any other category of insurance the legal protection of industrial property rights is subject to frequent claims, the average cost of which is particularly high. PRESENT SOLUTIONS IN EUROPE It is understandable that in these circumstances, in view of the particular difficulty of this category, companies in the various markets for legal protection insurance in Europe are not falling over themselves to offer insurance cover suited to the defence of industrial property rights. The CEA has surveyed the three main markets for legal protection insurance in Europe which could take an interest in this field, those in Germany, the United Kingdom and France. There do not seem to be any other countries in Europe where even the slightest initiatives have been taken on this matter. 359
In Germany. i.e. in the country in Europe where the market for legal protection insurance is by far the largest, strongest and most sophisticated, the situation is simple. Since the general conditions for legal protection insurance drawn up by the national insurers association (ARB 94 Allgemeine Bedingungen für die Rechtsschutzversicherung 1994) explicitly exclude cover for `the defence of legal interests in the field of inventors rights, patents, trademarks, designs and models or any other area of intellectual property', contracts developed by one or other of the specialist insurers are not recognised. The basic reason for this is precisely the very high probability of claims resulting from the observed tendency of the holders of industrial property rights to seek insurance cover only when they have good reason to feel exposed to the likelihood of having to take legal action or defend an action against them. Added to this there is the realisation that even in the very large German market the spread of policyholders that could be achieved for this type of cover is too small and out of proportion to the very high cost of claims, with the corresponding necessity of fixing very high (too high) premiums, which would discourage potential policyholders. As we have already heard, there is one exception, as it appears that one company does offer for a fairly high premium cover limited to DM 1,000,000. In the United Kingdom a few Lloyd s syndicates offer cover for the protection of intellectual property rights. The limits on liability and the precise terms of the cover offered are determined case by case. The portfolio built up does not seem, according to our information, to be very large. Its seems that in general the basic cover is limited to the territory of the United Kingdom of Great Britain and Northern Island, together with the Isle of Man and the Channel Islands, but that it is possible, on a case-by-case basis, to extend the territorial limits to the countries listed in the special terms and conditions. Policies 360
can cover the defence of the interests of the insured party in the various fields of intellectual property: patents, copyright in designs and models, brand names and trade and service marks. In general the insured seems to be expected to pay 10% of the costs or expenses incurred. Once again, each particular case gives rise to a made-to-measure contract. It should be noted, however, that apart from these few Lloyd s syndicates and it is not known how intensively they operate in this area the only conventional insurance company which to our knowledge ventured into writing this type of policy in the United Kingdom withdrew from the market in 1994. Having first reduced its liability to a maximum of 100,000 per claim (whereas it had offered cover of 250,000 and 500,000 per claim), this company finally withdrew from the market after seeing how strong the antiselection process was in this category of policies. According to the information given to us, this insurer took the decision to withdraw after observing that applicants sought cover only because they were already aware of a potential problem, or because problems were commonplace in their field of activity. It should be added that the policies were generally sold through a patent agent, who was sure to inform his clients of their rights and only suggested taking out legal protection insurance in the event of probable litigation, given that the purpose of the insurance was to cover the expenses and fees of this same patent agent, whom the policyholder would naturally choose! These situations obviously gave rise to serious conflicts. However, as already mentioned before my paper, a few insurers have very cautiously ventured to offer limited cover (for a premium of 4000-5000) on the UK market. In any case the situation is not very satisfactory. In France an experimental scheme was tried in the 1980s, when the French insurers federation (Fédération française des sociétés d assurance) provided the country s 361
legal protection insurers with a model policy, called Brevetassur, which offered cover for actions as plaintiff or defendant relating to patents, patent applications or utility certificates up to a maximum of FRF 100,000 for disputes declared in any one policy year, with the geographical scope restricted in principle to the territory of France. It may have been precisely because of this excessively narrow scope in material, financial and geographical terms that the scheme had little success, since only about 100 policies were sold and these were the subject of heavy claims showing once again the propensity of cover of this kind to attract only bad risks. For the moment that is as far as things have got in France, although consideration is now being given to relaunching the `Brevetassur' project with higher cover limits, comprising a limit per claim within an `aggregate' limit per policy year, and a territorial scope that could be extended to the whole EU. But nothing has been decided yet, as the overriding preoccupation is still this problem of antiselection, which could prove to be the major obstacle to the development of this kind of cover. POSSIBLE SOLUTIONS FOR THE FUTURE As we have seen, the problem is rather like that of squaring the circle. For a legal protection insurance product to be successful, the necessary (minimum) conditions are as follows: 1. legal protection insurers, whether specialist or not, who have sufficient resources to cope with the constraints in terms of highly technical expertise, financial liability and territorial coverage which providing effective cover involves in this particular field; 2. a spread of policyholders that is sufficiently broad not to comprise essentially those who constitute a bad risk and will have an abnormally high claim rate; 3. a spread of policyholders that is sufficiently broad to ensure the collection of premiums at reasonable rates which will still allow sufficient financial 362
resources to be built up to cope with a pattern of claims in which the average cost is high, without leading the insurer to run a loss on this category of business. It is well known that the underlying cost of insurance is obtained by combining two components: the frequency and the average cost of claims. If both of these components are too high, the risk is not insurable. How can these two components be influenced? We would clearly be deluding ourselves if we hoped for any more than marginal reductions in the various expenses which contribute to the cost of claims in this category. As regards reducing the frequency of claims, a number of proposals are worth considering. a) Firstly, one idea is to involve policyholders in maintaining the quality of their risk by making them personally liable for a not insignificant portion (in any case more than 10%) of the costs of any claim. This system of excess is bound to be necessary, but it will clearly not be sufficient. b) It might be possible to introduce compulsory insurance, whereby all holders of an industrial property right are required to take out legal protection insurance for their right to be officially registered. This solution is difficult to put into practice, however. Laying down a rigid framework of minimum cover, which is a fundamental feature of systems of compulsory insurance, is totally out of step with the need, as in the present field, to draw up made-to-measure contracts, on a case-by-case basis. Moreover, experience shows that a system of compulsory insurance which works well for covering mass risks which are familiar and well-assessed, such as third-party motor insurance does very little for the development of new, unfamiliar forms of cover. An insurance market for the coverage of a risk as problematic as the one that concerns us here does better in an atmosphere of freedom than in a context of compulsion, which is on the contrary likely to discourage insurers from venturing 363
into a scheme over which they have no control. c) Lastly, a third option is conceivable, which would be to have insurance taken out on behalf of parties filing rights, the policyholder being the official institution with which the rights are filed. But this solution poses various problems of feasibility: who would the insurer be? This would no doubt require the creation of an insurance pool, but there is no certainty that this pool which there would be no question of forcing insurers to join would actually bring together the requisite technical and financial capacity for concluding suitable contracts. Moreover and above all it is likely that in all markets legal protection insurers, who are essentially involved in covering personal risks and tend to be individualistic in a highly competitive climate, would be reluctant to take part in a collective scheme of the pool type. CONCLUSION I hope the information I have give you in this brief presentation, relating on the one hand to the financial data of this young branch of insurance and on the other to the particular features of insurance cover for the protection of industrial property, will have given you some idea of how difficult it is for insurers to venture into this category of operations, which poses, to say the least, a very difficult problem of insurability and of technical and financial equilibrium. 364
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