Trade Secret Insurance Considerations


Trade secret insurance protects businesses from financial losses resulting from the theft, misappropriation, or unauthorized disclosure of their trade secrets.  A broad definition of trade secrets requires information to be (a) protected as confidential and proprietary; and (b) have economic value because the public does not have access to the information.  That being said, do not be tricked into thinking all confidential information automatically qualifies as trade secrets. 

Please read this earlier blog post for insight into issues that impact whether confidential information should qualify as trade secrets: When Secrets May Not Be Trade Secrets  

1. You Must Actually Have a Trade Secret: It is no surprise that the most important aspect of trade secret insurance is actually having a trade secret that can be protected.

2. Risk Assessment:  insurance companies conduct risk assessments of trade secret (and total intellectual property) portfolios and trade secret protection measures as part of the underwriting process.   Therefore, you should perform your own risk assessment and then fix the issues that are discovered.  Many companies outsource this assessment to their attorneys because then the report is likely subject to attorney-client privilege and the protections offered by the privilege.  If your current attorney or law firm is not qualified to perform such an assessment, then you should engage a legal professional that can properly assist you.

3. Protection from Internal and External Threats:  Trade secret insurance can protect against both internal and external threats to trade secrets. Internal threats may involve employees or contractors, while external threats could include competitors or other entities attempting to gain access to proprietary information.

Four underlying issues points about threats to trade secrets often do not receive the consideration they require. First, it is imperative an experienced IT team or firm—which can be insourced or outsourced—is employed.  Failure to hire qualified individuals indicates a company does not adequately value the confidential information for it to be considered a trade secret. 

Second, if you are engaging an external IT firm, then you should inquire into whether that IT firm’s insurance will protect you.

Third, failure to properly protect trade secrets and obtain trade secret insurance may be breaches of directors’ and officers’ fiduciary duties and general obligation to exercise sound business judgment.   Discussing the impact trade secret protection has on all of your insurance needs—regardless of whether they are currently covered—with an experienced and well-versed insurance broker should not be overlooked.

Fourth, you must always be cognizant of data scraping.  Over the past several years, litigation over information obtained through legal and illegal means through data scraping has shown vast amounts of information are unintentionally made available to the public.  Scraped information may include actual invoices showing your customer pricing, which is a scary proposition.

4. Insurer Provided Legal Assistance:  Nothing in life is free.  Trade secret insurance policies often provide access to legal expertise and resources to help businesses navigate trade secret issues; however, you must always remember those attorneys are paid by the insurance companies.  Your insurance policy may contain requirements to share information under circumstances that may cause problems under third party agreements, regulatory requirements, and a variety of other reasons.  You must be careful not to violate any agreement or law before sharing any information.

Trade secret insurance can be a valuable component of a comprehensive risk management strategy.  It is essential to work closely with your insurance broker and attorney to ensure your specific needs and risks are met including implementation of strong internal safeguards and best practices for trade secret protection regardless of whether insurance is ultimately procured.

David Seidman is the principal and founder of Seidman Law Group, LLC.  He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues. He can be reached at or 312-399-7390.

This blog post is not legal advice.  Please consult an experienced attorney to assist with your legal issues.


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