Protection of innovation: avoiding the risk of disputes in coverholder agreements

HFW partner Adam Strong examines how insurers can foster better relationships with coverholders to avoid any fallout or costly litigation over intellectual property at the end of a joint venture.

Although the trend has somewhat levelled off recently, the last few years saw an increasing number of insurers partnering with insurtech companies in order to deliver more innovative services to customers.

However, it is all too often the case that when entering into an agreement, they do not consider key issues around who will own any intellectual property (IP) created or improved upon during the partnership, and the treatment of any confidential information created or shared during the agreement. This is not something unique to the insurtech sector, but rather applies to all coverholder relationships.

In these sorts of arrangements between a coverholder and capacity provider, the information shared typically includes input into, and the development of, ratings engines, sharing of underwriting rules, the data sets generated during the arrangement, and goodwill generated, among other things.

It must be remembered that the IP generated during the agreement is very important, as it may last longer than the venture itself. It is also sometimes the case that the data generated from these sorts of partnerships can be more valuable than the actual underwriting, as insurers seek to use it to become more competitive and move into new areas of business.

There was a well-publicised dispute in this area between insurer Mulsanne and unicorn tech company Marshmallow, culminating in a liability judgment in 2022. The parties entered into an agreement whereby Marshmallow acted as coverholder selling motor policies to underserved markets utilising technology and a ratings engine that it had developed, while Mulsanne provided the insurance capacity.

As is common, the terms of business agreement (TOBA) contained an obligation not to misuse confidential information and some termination provisions, but nothing further around these issues.

During the course of the relationship, various inputs were made and shared by Mulsanne, in the form of, for example, some additional ratings tables and underwriting rules. After a time, Marshmallow sought to develop its business by establishing its own insurer. Whilst it was not disputed between the parties that this sort of step was not uncommon in the industry, Mulsanne objected to anything that it considered as belonging to it being used within the ratings engine for other purposes. Marshmallow attempted to rewrite or bypass those parts of the ratings engine that arguably belonged to Mulsanne, and in so doing created a new ratings engine.

However, Mulsanne brought a claim alleging, among other things, that Marshmallow had, despite these efforts, used some of Mulsanne's confidential information in its new model, or that its confidential information had provided a springboard for Marshmallow to develop its business (for example allowing it to put reinsurance in place by producing quotes from the engine). It also alleged various breaches of the TOBA and passing off. As a result, the parties entered lengthy and complex litigation.

To resolve the dispute, it was necessary for the judge to pick apart exactly what had been contributed by whom and where, whether that information was in fact confidential or if for example some of it could have been produced by any experienced underwriter, and how that information was used as matters had developed. Although Mulsanne was successful in a few instances with its allegations, many were unsuccessful and along the way more than half the original case was dropped. The legal costs incurred by both parties were very substantial, and it was reported that Mulsanne was required to pay Marshmallow a significant proportion of its costs.

It is understandable that addressing these issues at the start of the relationship may cause some difficulties, with the parties potentially mindful of not raising anything that may get in the way of the venture, or anything to suggest that it may not be viewed as a long-term one. However, the consequence of not doing so is the risk of a messy dispute at the end. In circumstances in which the decision to separate is not a mutual one, then failing to adequately deal with these issues at the outset can allow the jilted party to be difficult when it comes to the breakup.

These issues are not addressed in the standard Lloyd's TOBA, and there are a number of issues to consider. One solution that can work to safeguard against litigation at the end of a partnership is for the parties to enter a separate agreement that addresses the IP issues.

Some essential points that such an agreement should include are:

  • Who owns what at the start of the venture: this should, ideally, be clearly documented
  • On what basis each party will contribute confidential information or input, such as underwriting rules, to the joint project
  • Who will own or have rights in relation to the resultant joint IP, i.e. any improved ratings engine
  • What the arrangements are for IP and confidential information on termination of the agreement: can the contributions of each be unwound, and if not, who has the rights to use it going forward?;
  • Who has the rights to the data generated during the course of the agreement and, importantly, after it has ended; the same too with respect to the other information needed to service the contracts of insurance

Without dealing with these issues upfront, the parties can find it difficult to move on with their next venture, and they may find that they have to incur additional time and costs in building up their models from scratch.

The useful lesson that can be taken from the dispute is that prior to entering into business together, coverholders and capacity providers should not shy away from any potentially uncomfortable conversation over IP ownership at the start. Any awkwardness or small increase in the start-up costs is far preferable to a complex and costly dispute at the end.