In this episode of Construction Blueprints, Tom Grandmaison, Construction Chief Client Officer, is discussing with our special guest Kim Cauthorn, Global Intellectual Property Leader, how organizations can protect themselves against financial loss resulting from accidental or malicious insider actions that cause loss, leakage, damage or destruction of intangible assets. You will also hear more about WTW’s new offering - an intangible asset protection solution.
Historically, the construction industry has been behind compared to other industries in terms of embracing technology. But things are changing, and construction companies are starting to utilize technology creating their own intellectual property, their own solutions and leveraging technology in a variety of different ways.
By definition, intangible assets are those that are not physical in nature, but are identifiable, and can be bought and sold independently of the owner. In this podcast, we discuss a first party product that is meant to ensure the intangible assets themselves. The assets that we're focused on are the non-public proprietary intangible assets owned by companies.
SPEAKER 1: Our clients are increasingly using technology not only to manufacture building materials, but also to efficiently run and monitor facilities, which is kind of part of the post construction lifecycle.
SPEAKER 2: Welcome to the WTW podcast, Construction Blueprints, where we discuss the latest risk management and insurance trends as well as issues facing the construction industry. We'll speak with a variety of construction leaders and experts on global topics who can help provide you a blueprint for building your industry knowledge.
Our clients are increasingly using technology not only to manufacture building materials, but also to efficiently run and monitor facilities, which is part of the post construction lifecycle.”Kim Cauthorn | Global Intellectual Property Leader
TOM GRANDMASION: Hello, and welcome to our Construction Blueprints podcast. I am Tom Grandmaison, the WTW Construction Chief Client Officer, and I'm also your podcast host today. I'm delighted to be joined by Kim Cauthorn. In this episode, we will explore our new intangible asset protection solution. Kim, could you please introduce yourself.
KIM Cauthorn: Hi, everyone. My name is Kim Cauthorn. I am the global intellectual property leader and specifically, I'm part of the cyber team.
TOM GRANDMASION: Great. So today, we're going to talk about a new offering that Kim and our team created, intangible asset protection, we're going to talk about it specific to the construction industry. Kim, what was the impetus for the WTW creation of IAP?
KIM Cauthorn Well, I've been in the intellectual property and insurance space for, gosh, 23 years or so, but as I worked more closely with our colleagues in the cyber practice, it dawned on me, and the rest of our intangible asset innovation team that we had formed, that the majority of many companies’ enterprise value is intangible.
That's just we've kind of had this inversion in enterprise value over the last 25 years or so but less than 20% of companies’ intangible assets are insured. And then the second thing we noticed, as we studied how intangible assets can be impacted, is that it's often insiders that cause the financial damage and nowadays companies have an even greater concern about that really for two reasons.
One is because so many more employees work remotely, at least part of the time, which means there's less oversight if employees-- and frankly, just more mistakes get made. And the other is low employee retention rates. And so when employees walk out the door, unfortunately, they often take intangible assets with them.
TOM GRANDMASION: That's great insight. Thanks. Now thinking about the construction industry specific, what is our collective view of construction as one industry segment as compared to some others that might quickly come to mind in terms of how folks think about intangible assets in IAP in general?
KIM Cauthorn: It's really interesting because you wouldn't think of the construction industry as being intangible asset rich, but like every other industry it seems like, there's been technology convergence and technology impact even on the construction industry. I remember about four years ago, I was on a call with one of our clients, and they, interestingly enough, were concerned about protecting their manufacturing processes that they had developed for prefabricated building components for commercial buildings.
And they were also concerned about protecting the blueprints and the methods for fitting those components together. And then just the other day, I think it was you who pointed out how 3D laser printers are being used to make a special type of concrete for prefab structures. And so you've got the actual construction materials and how they're put together but then another area that-- and again, I think this is something that you pointed out to me and when I look at some of the clients I've worked with, I'm like, of course.
And that is that our clients are increasingly using technology not only to manufacture building materials, but also to efficiently run and monitor facilities, so-- which is kind of part of the post construction life cycle. So they're using things like IOT enabled technology so they can monitor remotely, is the HVAC system working?
During weather related events, has the electricity gone off? Has the generator turned on? Things of that nature. I think, like I said before, it's just that even the construction industry is becoming increasingly reliant on technology.
TOM GRANDMASION: Agreed. And I think historically, the construction industry has been a little behind compared to other industries in terms of embracing technology, but I know myself and all of our colleagues across the construction platform here at WTW are working with lots of clients and prospects to embrace and utilize technology in a variety of different ways and creating their own intellectual property, their own solutions, leveraging technology in a variety of different ways.
So I do expect that the need for this will only increase as time goes on, and we'll be sure to share perspectives and examples with clients and prospects as we move forward so this is not a static sort of a situation. Let's talk about the practicality of the offering itself. Can you talk a little bit about the limits and the retentions or the deductibles that are typically required for this kind of coverage?
And then second part, how is the coverage provided? Is it-- is it a stand alone policy? Is it a first party policy? Is it an add on to an existing policy?
KIM Cauthorn: I'll take that last question first because that was something we really explored is, hey, can we just add this to a property policy, for example? Or even to a cyber policy? The challenge is it's unique, it's new, it's a surplus lines type of coverage and so it's hard to get insurers to say, oh, sure just add this on to my existing policy when they don't really understand a whole lot about it and don't have familiarity or experience with it.
So I think longer term, that could happen, shorter term, we decided to keep it as a standalone also because it's built to be modular because we intend to add more events and more types of intangible assets and higher limits as we go along. But the offering that we have launched with is a first party product so this is meant to ensure the intangible assets themselves and the specific intangible assets that we're focused on for this first version are the non-public proprietary intangible assets owned by companies.
And what we're protecting against is financial loss resulting from accidental or malicious insider actions that cause loss, or leakage, or damage, or destruction of those scheduled assets. And these are actually assets scheduled on the policy so you almost have to think of it as like a fine art policy, or a classic car policy, or jewelry policy similar to that.
It's a $10 million limit. Again, we're hoping to grow that a minimum of 5. And then we have sub-limits for each section of coverage. So there's a million dollar limit for investigation costs, a $2 million limit for prosecution costs to go against malicious insiders and related third parties and then a $7 million limit to cover lost income and repair costs or redevelopment costs for those accidental insider events.
I think you asked about retentions. For investigation costs, there's $100,000 retention per event, and for the prosecution cost coverage, there's also $100,000 retention per event. For the accidental event coverage, there's no retention.
TOM GRANDMASION: Great. How about how about premiums? Minimum premiums. Things of that nature.
KIM Cauthorn: Until we get the first few policies placed, we can't offer more than a 10 million limit, but we can offer as low as a 5 million limit. And how that translates in terms of premium is for a 10 million limit policy, we've tested the model repeatedly, we've discussed this with our insurers, and we did a lot of product testing with clients and even companies that are not clients.
And both from what the underwriting model was producing and from what we were hearing from folks, they were OK with premiums in the range of 100,000 to 500,000 for the 10 million limit and premiums in the range of 50,000 to 250,000 for the 5 million limit.
TOM GRANDMASION: Great. And you talked about the modular nature of this over time so I suspect that over time, limit profiles could be expanded as interest grows and the portfolio grows in and of itself?
KIM Cauthorn: Absolutely. And we really-- this was another thing when we were talking to insurers. So we actually had a lot of interest in the product. We wanted the insurers to be fairly aggressive. In other words, we didn't want them to wait until we had 10 years worth of loss experience before they were willing to increase the limit.
So our agreement with them was hey, if we can get 10 policies under our belt, will you let us increase the limit? And the answer was yes. And we actually are oversubscribed, so it won't be any problem at all being able to offer a higher limit once we have those first few policies under our belt.
TOM GRANDMASION: Great. And in terms of scheduling the type of assets on the policies you mentioned earlier, I take it that's something that's discussed between you and the client in terms of what it is they're trying to solve for and how to define it. Is that a good way to think about it? And then how should folks be thinking about what to insure in terms of intangible assets?
KIM Cauthorn: I mean, it's a great question. I think it's actually the hardest part of completing the application. Most of the application, if it's not going to be anything they haven't seen asked before or on a cyber techie policy or even just general professional liability or general liability policy and property for that matter.
The part that gets hard is exactly what you pointed to, which is how do we select which assets. And there, we've had clients, for example, who said, well, my goodness, we could select this intangible asset because we consider it to be our secret sauce, our Coca-Cola formula so to speak, but gosh, it's worth way more than a 10 million limit.
And our answer is eventually, we want to be able to ensure that the value of an asset, but for this first iteration of the coverage, it's more about protecting R&D budgets, it's more about protecting against lost income. So almost like business interruption coverage, but this is specific to assets. So that, for example, if your next release of your software is delayed because one of the coders corrupts the code base, and that sets you back and so now you know you're going to lose at least a couple of months worth of income, that's the sort of thing that we're covering.
Or if you've got something new under development, you're really excited about it, but you've got a really tight R&D budget and then something happens, and now you're going to blow your R&D budget, this coverage helps protect against that. And so when you're thinking about, well, gosh, which assets should I insure? That's the exercise that we're working through with clients to help them prioritize.
And think too even, this is one thing and obviously, M&A happens in the construction sector as well. This is looking not only at your existing assets, but maybe assets that you're looking to acquire as part of an M&A transaction. So in looking at well, what would the impact be on revenue if something were to happen to this asset? What would be the impact if it became public either on accident or on purpose?
So things of that, we have a two, really a three pager where we walk clients through a guide on how to identify and prioritize which assets they want to ensure.
TOM GRANDMASION: That's good insight. How about from a risk management support and resources perspective? Can you talk a little bit about what we are offering or planning to offer as we go forward?
KIM Cauthorn: So that's one thing that is the beauty of developing the underwriting model ourselves because we can actually turn that into an analytics tool. We didn't want to do it right off the bat because we've still got to make sure that it's a working model, that it's working like we expected it to work in case we need to tweak any assumptions.
We did have a fair amount of data but not a ton of data to go by because when a company has something happen with an asset and maybe it's an accidental insider type of event, it's not something they're required to report so it's a little harder to find those incidents. They most often occur as part of data breach incidents.
And so we actually, again, partnered with my cyber colleagues to look at those data breach events and found that actually a lot of times it was the company's own intangible assets that were affected. So long story short, it will be an analytics tool just like we've done with property quantified and our other analytics tools, but in the meantime, one thing that we did develop because we're still working on the model, we're still collecting data, the insurers wanted some subjective tools to use in the underwriting process.
And so one of the things that we developed is an insider risk management questionnaire, and we worked with our colleagues within the cyber team who were former CTOs, who were former cyber underwriters, who are former Air Force Intelligence folks, and they helped us develop these questions. Looked at a lot of other sources as well.
For example, we have clients that have developed software to monitor insider events and behaviors and so we asked them what they looked at. And so we developed this set of 40 questions and you're given a score and we'll be sharing that score with our clients. And it's a pretty complicated scoring process because it has to do with a whole lot of things-- it's sector, number of employees, types of assets, et cetera.
And so two companies may get the same score, but that score can mean very different things because of which sectors the companies are in, et cetera. So we'll definitely be sharing that with the clients.
TOM GRANDMASION: That's great. Thank you. How about from a claim perspective? For instance, if there is a malicious insider event, is the insurer able to select their own counsel? If it's an accidental insider event, is the process similar to a business interruption claim?
KIM Cauthorn: Yes, is the answer, but let me give you some more detail. I was head of claims at what? Four other places prior to coming back to the broking and risk advising side, and so I've got a lot of sensitivity and have learned a lot about selection of counsel, selection of other experts, being flexible, seeing where the frustration points were.
And so one of the things we did is we said, look, at the outset, you may not know if the asset was impacted by an insider or an outsider. You may not know whether it was malicious or accidental, so we wanted to provide a lot of flexibility around the investigation costs coverage. So for example, if you believe an employee did something, they're still at the company, you're trying to delicately figure out what was going on, you may want to hire outside counsel to lead that investigation.
As part of the investigation cost coverage, they would need to select someone off the panel, but we're right now developing that panel and we're asking for input from clients so that we can have both law firms and other experts such as computer forensics folks that they would feel comfortable using. So for that, they would select someone off the panel.
Now once it's been determined-- for example, you mentioned the malicious insider. Once it's been determined that yes, it was a malicious insider, maybe a former employee who's gone to a competitor, and now you want to pursue legal action against that former employee, and that competitor that they've gone to, you can select your own counsel subject to approval from the insurer.
And this is not a duty to defend. If the approval is given to pursue that legal action, then it's in the hands of the insured to run that litigation. And then like you said, for the accidental insider event, it does work a bit like a BI claim, but again, talking to folks, you've heard lots of horror stories about how long and adversarial a BI claim adjustment can be and so we didn't want that same experience. We wanted to make it as streamlined and as quick as possible.
So one of the things that we did is it's not really a parametric approach, I'd say it's parametric light in that once it's determined, through the investigation, stage that a scheduled asset has been impacted by an accidental insider event, there's some type of financial loss, whether it was an asset under development and so now they've got to re-incur R&D costs or whether it's lost income.
At that point, even if you don't know exactly what the amount of your financial loss will be, you'll receive an interim claim payment of up to 10% of the per event per asset limit on the face of the policy. So that will ease that pain a little bit. And then after a final proof of loss is submitted, any additional amount owed for that lost income or redevelopment or repair costs will be paid.
TOM GRANDMASION: How about just from a market perspective? Are we the first broker to bring such a solution to the market? And then maybe talk a little bit about the support that we're getting from carriers. Is this multiple carriers that are providing the solution with us, or is it one carrier?
KIM Cauthorn: Yeah. So we are the only broker offering this type of a coverage. As I said before, it's a bit unique in that we developed the policy wording and the underwriting model, and then we went to insurers to see if they were interested in supporting it. And as I mentioned earlier, we had interest from a number of insurers, but really given the unique and new nature of the offering, we decided to launch the product with a panel of Lloyd's syndicates.
Lloyd's is really working hard to, frankly, catch up in this space because the insurance industry as a whole knows that it's behind in offering products that protect intangible assets. It was actually an interesting process, because it's such a new and different product that each of the syndicates had to go through their own new product approval process.
So it was quite a due diligence process but they're very excited to support it. And while there are some overlap, so for example, you can buy an IP pursuit or forcement policy where you can pursue a trade secret misappropriation claim against someone, but it's very narrow, it's very narrowly defined. It's litigation costs only.
You can only bring a trade secret misappropriation claim. This can't be theft of company property. It can't be damage to company property. It can't be breach of contract. This does a lot more than that does. But that's really-- the only other potential overlap is with cyber policies where you might have the same event that impacts not only sort of the traditional personally identifiable information of customers, but also the insured's own intangible assets, and we have provisions in the policy to address that.
But otherwise, yes, this is quite new and different and we're very excited about it.
TOM GRANDMASION: That's very exciting. As you look out over the next 5 to 10 years from a macro risk perspective, I guess in North America or more broadly, globally, what should some of our listeners be thinking about in terms of potential emerging risk factors as they contemplate their own intangible asset risk and be preparing for potentially exploring this type of solution?
KIM Cauthorn: Well, of course, one of the big trends that folks are talking about these days is artificial intelligence or AI. We don't really even know how all that's going to play out. Interestingly, that's one of the assets that we can insure now. If we have a client that has some type of artificial intelligence offering, we can certainly insure it.
Another area that you're hearing a lot about is blockchain technology and blockchain is really just software, but there have been incidents where the key to the blockchain has been taken or lost. So you've got events like that, that whoever would even have thought of those events even three years ago? And of course, another area is web 3.0 or otherwise known as the metaverse.
And for my kids' generation, and they're in their 20s and 30s, they don't really see a distinct line between the web 3.0 and the physical world, and we're going to have situations in the future where folks are building things in the metaverse and what happens if something doesn't get built right, or they're not where they thought they were located? They thought they were located next to Jennifer Lopez's house, and it's not and so will there be insurance for that?
So all kinds of areas like that, that I think we've just hit the tip of the iceberg just to give a few examples. I know that we're looking at, as I mentioned before, ultimately, being able to insure the value of assets themselves. Been one of those things where it's hard to value intangible assets, and those valuations are pretty volatile, but we're hoping to collect the data to be able to do that for clients to give them that full coverage.
And there's other things, of course, like brands. Brands are so important for all kinds of companies, not just companies, for example, in the consumer product space-- key licenses and franchise rights and permits. Permits are especially in the construction industry, very important. And then just looking at all the different ways that these types of assets can be impacted and figuring out how to address those.
Those are some of the things that we're looking at but it's, in many ways, a brave new world out there right now.
TOM GRANDMASION: That's for sure. That's for sure. Good insight, though. Really appreciate that my. Final set of questions really relate to getting something started with you and the WTW team in terms of folks that are listening in that might be interested in exploring a proposal. You mentioned the questionnaire earlier. What other kind of information is required to facilitate a proposal? And generally speaking, what is the turnaround time in terms of the point from which you get all the information you need until the point when a listener could be getting a proposal from us?
KIM Cauthorn: Sure. I'll take the last question first. I mean, again, we're fortunate because we did develop the underwriting model in conjunction with our colleagues in the insurance consulting and technology part of our business and what we did-- you'll notice that the application is in Excel file with several tabs.
We're able to take that completed Excel document and feed it directly into the underwriting model. I have it sitting on my laptop. I can do it, and it takes about two minutes. And then we take the output, put it into an underwriting report, and we provide that to our lead syndicate, which is Tokio Marine Kiln.
They look at it. They're going to do a little bit of their own underwriting, as I mentioned earlier, but they also committed that they would get it turned around in 48 hours. And then we present to the rest of the panel, they, in turn, have to agree that they've got to give the thumbs up or thumbs down that they agree with the pricing and the coverage within 48 hours.
We're trying to make this as seamless and streamlined and quick as possible so that it's not-- this is not meant to be a bespoke underwriting exercise so that we can get quotes turned around in a week or so or less. That's the timing. In terms of the information needed, one thing is it is required that clients have cyber insurance in place before they purchase this coverage.
There are a couple of reasons for that. One is that the insurers know that they understand that this is for protecting their own assets, not the not their third party PHI, PII corporate confidential information of third parties, et cetera. The other is they know if they've been able to get the cyber insurance in place, then they have minimum safeguards in place, and as anyone who's had to fill out a cyber application recently knows, they're pretty detailed.
So they do some of the underwriting for us quite honestly. Not all of it obviously because this isn't just a pure cyber incident, but there is a lot of overlap. The other thing that we request is information about number of employees, information about any prior intellectual property disputes or disputes related to the assets that they want to insure.
I mentioned earlier, there's a 40 question questionnaire, all yes/no questions, but it may take a couple of different people within the organization to complete it. And then it's really-- as we were mentioning before, it's providing the information about the assets, and they're really divided into two, either assets under development or assets that are generating revenue or contributing to revenue.
And for each of those assets, we need a description, we need to understand that this is, in fact, an asset owned by the applicant, number of employees with access to the asset and then some financial information. For example, if it's revenue generating, then what's the actual revenue been for the last couple of years, and what's the projected revenue for the next year?
And we provide examples of the level of specificity needed for the description, because for example, we've had clients who say, well, some of these assets that I'm considering insuring are actually trade secret protected, so I can't give you the trade secret. We don't want to see anyone's trade secrets. We don't want the insurers to see anyone's trade secrets. It's more a higher level description of what is being protected, not the formula itself, for example.
So we provide those descriptions, and then, as I said, we also have the identification and prioritization guide. And that's really it. It looks big because it's several tabs, but we've tried to keep it certainly shorter than a cyber application.
TOM GRANDMASION: That's a good start, right? Yeah. That's great guidance. Thank you, Kim. Is there anything that you'd like to mention before we close out that I perhaps haven't explored with my questions? I want to make sure we give you the opportunity to put forth everything you'd like to get out.
KIM Cauthorn: Well, I would say a couple of things, and this has been after-- we're having discussions with clients every day about this coverage, and I know especially when we have clients who have risk managers and they say, gosh, I don't know that much about which assets we consider to be the most valuable. I don't know what we're doing in R&D.
And it really-- it is not a single discussion. It takes more than one discussion because you've got to pull in folks from different parts of the organization, and I, for example, am used to that with intellectual property insurance. You may have to bring in in-house counsel, for example, you might have to bring in the CISO or someone who is responsible for R&D and that's all right.
We know that we've there may be more than one conversation, but one thing that has been interesting in the discussions we've been having with clients is look at it as an opportunity to learn your organization better, because it's really, I think, helped some of the risk managers we work with understand the broader risks that their companies face.
Sometimes we think about risk purely as by a line of insurance and instead of saying, let's look at the company, let's look at what the company is doing and, kind of, looking at it more from an enterprise level. So it can really, I think, help the risk managers or whoever's responsible for insurance do their jobs better.
So I really encourage folks to at least explore. It doesn't mean you have to buy it but at least I think it's worth learning more about it and how it could help your organization.
TOM GRANDMASION: Now that's good insight. And I think the mere fact that we're talking about intangible assets makes this one that I think folks are going to need to get educated on further and further and better understanding as an industry what's important, what's necessary, how to value it, et cetera. So I think this is an exciting time. I'm excited that we're getting in on the ground floor as it were.
Kim, thank you very much for contributing to this episode and for sharing your perspective on such an important fast emerging topic.
KIM Cauthorn: Tom, thank you. I really appreciate this opportunity. I'm always excited to talk about anything related to intangible assets and especially for folks who may think, well, gosh, that doesn't apply to me and then get a little bit more educated and aware of well, in fact, maybe it does so thanks again for the opportunity.
TOM GRANDMASION: And I'd like to thank everyone who listened in today. Thank you for joining the WTW Construction Blueprints podcast. We'll look forward to seeing you on the next one.
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Tom has served clients in the construction industry for over 35 years delivering commercial property casualty solutions. Tom has held a variety of executive leadership roles on both the underwriting and brokerage sides of the business. Tom currently serves as an EVP, Chief Client Officer, leading the Construction strategies to ensure clients maximize their strategic approach to managing risk and receive superior brokerage and advisory support. He leads multidisciplinary, client teams focused on reducing the total cost of risk for large and complex businesses and projects, delivering long-term, sustainable value.
Tom has extensive experience addressing some of the most challenging and complex risk issues construction clients face, from wildfire risk to New York construction risk, fleet risk and construction defect litigation.
Kim is an attorney with 35 years of experience in insurance, consulting, academia, and law. She has focused on intangible asset and intellectual property risk management and insurance for the past 22 years. Kim’s clients and insureds have included a range of large, public, private, and start-up companies in the networking, software, mobile communications, consumer electronics, consumer product, media, financial services, niche manufacturing, retail, luxury brands, life science, utilities, and energy sectors.
In addition to her insurance broking, claims, and MGA/MGU experience, Kim has previously provided consulting services for a number of firms and practiced law at Baker Botts. Kim is a frequent author and speaker on IP risk management and insurance topics.