Will intellectual property fights stifle the usage-based insurance market? Susan Kuchinskas reports
It's a great idea whose time has come: Base auto insurance rates on an individual's actual driving instead of on a chart. Progressive Insurance says it thought of it first—and it has patents it says prove it.
Progressive Casualty Insurance Company has three patents covering insurance technology. The one directly related to the insurance telematics industry is Patent No. 6,064,970 , which covers a motor vehicle monitoring system for determining cost of insurance.
In January 2011, Progressive filed a patent infringement suit against Allstate, Liberty Mutual and Safeco, claiming their pay-as-you-drive (PAYD) products infringe on that '970 patent. The suit also includes a claim of infringement on another patent covering the provision of online insurance quotes.
Allstate settled with Progressive in October 2011. Meanwhile, the patent was re-examined and, with some adjustments, upheld. In May 2012, Progressive added State Farm and Hartford to its infringement suit. Progressive declined to comment for this story.
Where do these intellectual property (IP) cases leave the usage-based insurance (UBI) market? (For more on UBI, see Special report: Insurance telematics .)
The state of play on patents
That '970 patent is fairly extensive, covering "A method and system of determining a cost of automobile insurance based upon monitoring, recording and communicating data representative of operator and vehicle driving characteristics … [including] an operating state of the vehicle or an action of the operator."
A report from the Brookings Institution noted, "Any insurance firm interested in offering per-mile insurance pricing understandably might be concerned that doing so would open it up to a possible patent infringement suit." Meanwhile, according to PatentWorld magazine, there were 268 global patents relating to insurance in 2006. In its recent report, ‘Personal Data Protection & Pay as You Drive Insurance’, Ptolemus Consulting Group identified 40 different patents potentially covering PAYD.
The fact that Allstate has settled with Progressive shows that the latter's position has strength, according to Frederic Bruneteau, managing director of Ptolemus. "A patent is clearly an advantage because you can threaten your competitors to slow them down," he says, regardless of whether Progressive would ultimately prevail in a lawsuit.
In the public interest
Michael Stolarski, a member of the law firm Dykema Gossett PLLC, suspects that, as other insurers enter the telematics business, Progressive will continue to pursue its intellectual property claims. This doesn't necessarily mean a lawsuit, according to Stolarski, or a demand to withdraw from the market. Licensing the IP is another alternative. He points out that the settlement with Allstate did not require the latter to drop its Drive Wise product.
Moreover, Stolarski says, the public safety benefits of the technology might weigh in a defendant's favor, even if it lost a patent infringement suit. A judge might be less inclined to order the defendant to withdraw an insurance telematics solution or to pay high damages to Progressive.
"There are some Supreme Court rulings that make it more difficult for patent holders to get injunctions,” notes Stolarski, “and this may be a situation where it might be more difficult for Progressive to get one, given the public interest."
Rolling out UBI programs
Progressive's patent infringement suits don't seem to be stalling the market so far. According to Towers Watson research, insurers representing 60 percent of the personal auto insurance market share have implemented a version of a UBI program in at least one state. Further, insurers representing an additional 20 percent of private personal auto premiums are running or preparing to run internal UBI pilots. At least one UBI program has been implemented in each state except Hawaii, and 17 states have implemented at least four personal auto UBI programs. (For more on UBI in the US, see Insurance telematics: US state regulators tackle UBI , Insurance telematics in the US: Ready to grow? , and Telematics and UBI: The regulatory opportunities .)
Robin Harbage, director at Towers Watson, says patent worries haven't dampened interest in his company's DriveAbility product, a solution designed for insurers that includes implementation, marketing, tech support and data transmission and warehousing. Harbage says the company has nine existing customers and an additional 11 scoping projects.
Meanwhile, the suits—as well as the requested re-examination of the '970 patent—are proceeding quickly, thanks to reforms made by the judicial system. "Courts around the country are getting more aggressive in expediting resolution of these cases," Stolarski says. In fact, in 2011, 97 percent of patent infringement cases were settled before trial.
Not only is this beneficial to companies tangled in IP litigation, it also helps to define the issues and appropriate damages, helping everyone make better-informed business decisions. (For other legal issues surrounding UBI, see Telematics and legal issues with V2V technology  and Telematics and privacy: The impact of ‘do not track’ proposals .)
Both Towers Watson and another insurance telematics vendor that declined to comment on the record said they advise customers to do their own due diligence. "Our view is that for each insurer that wants to launch, it's for them to do their own research into the patent and understand whether what they plan to do is not infringing, or else license it,” Harbage says. “It's obviously a difficult area."
According to Stolarski, there are two barriers to vendors providing indemnification against infringement claims to their customers. First, there are often too many companies in the supply chain. "Everywhere along that food chain, people are looking for protection from the supplier” down the line, he says. “It makes for a very difficult negotiation."
The second problem is that vendors tend to be much smaller than the customers they might indemnify. "Most patent holders look for the deepest pocket in the food chain," Stolarski says. But a technology vendor likely would not have the resources to satisfy a judgment against a huge company like Allstate.
Insurance companies will likely bear the brunt of any IP litigation. Insurers and telematics companies can't avoid this problem, no matter how the IP issues shake out, according to Harbage of Towers Watson: "There are hundreds of companies writing auto insurance in the United States, and all of them eventually will need to do this to be competitive in the marketplace."
Susan Kuchinskas is a regular contributor to TU.
For more on insurance telematics, see Special report: Insurance telematics .
For exclusive insurance telematics business analysis and insight, read TU’s Smart Vehicle Technology: The Future of Insurance Telematics  report.