Most businesses think of IP risk as something external. A competitor copies your product. Someone infringes your trade mark. A claim arrives out of nowhere.
In reality, some of the most significant IP risks are ones you have already agreed to. They are sitting in contracts you signed months or years ago, in clauses that felt like standard wording at the time.
What an IP indemnity actually means
Licensing agreements, collaboration deals, distribution arrangements and development contracts routinely contain IP warranties and indemnities. In plain terms, an IP indemnity is a promise. If a third party alleges that a product or service infringes their intellectual property, one party has agreed to cover the other’s losses. That can include legal costs, damages and settlement payments.
When the contract is being negotiated, the focus is usually on getting the deal done. The indemnity clause is treated as boilerplate. It rarely is.
Why the exposure is often larger than it appears
The problem with IP indemnities is that the exposure is frequently disproportionate to the size of the deal. A small business licensing its technology to a large distributor may find itself contractually responsible for indemnifying that distributor’s losses if an infringement claim arises. The larger the counterparty, the larger the potential exposure.
There is also a control problem that is less often considered. In some agreements, the party giving the indemnity loses control over the defence of the claim. Strategy, choice of legal advisers and settlement decisions can all pass to the counterparty. That loss of control increases both cost and risk, and it can mean a claim is settled on terms that damage your business even if the underlying allegation was weak.
When does the risk surface?
Usually at the worst possible moment. When a product is launched or scaled. When a new market is entered. When a third party asserts rights that nobody anticipated. By that point the contract has already been signed and the exposure is already there.
The question is not whether the contract should have been drafted differently. It is how the business manages the risk that is already in place.
What IP insurance covers in this context
IP insurance policies can respond to liabilities arising from contractual indemnities as well as direct infringement claims. The exact scope depends on the policy, but cover for indemnity exposure is an important and underappreciated element of what these policies can provide.
This is not a substitute for careful drafting. A well-negotiated agreement should limit the scope of any indemnity, cap the liability and preserve the indemnifying party’s control over the defence. But where risk cannot be negotiated away entirely, insurance provides a backstop.
For businesses that regularly enter licensing, distribution or collaboration agreements, the practical question is whether the indemnity exposure in existing and future contracts has been properly assessed and whether insurance is in place to respond to it.
As I often told clients when I was practising as an IP litigator, the time to think about how a contract will perform under pressure is before you sign it, not after the claim arrives.
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This article is provided for general information purposes only and does not constitute legal advice. Readers should seek independent legal advice on their specific circumstances before taking any action.
