A patent on an invention gives the inventor the right to exclude others from making, using, or selling the invention. So, a patent's worth is derived from the value of the invention and, in particular, the value of the exclusive use of the invention. It is important to note that the invention, by itself, can have value. The patent adds value by providing exclusive use. Of course, exclusivity adds nothing if there is no one else who wants to use the invention.

General asset valuation theories fall into three basic categories: replacement cost, market value, and income potential. Evaluating a patent's value using replacement cost theory is nearly impossible since patented inventions are unique and can only be invented once. That is, they cannot be replaced.

Likewise, a market value approach is difficult since the inventor's exclusive rights prevents market competition from being a factor in determining the value of a patent. An inventor's license fee or royalty is driven by economic factors related to the value of the invention to the potential licensee. For example, if the use of the invention can save a manufacturer $50 per unit, then the value of the patent to that licensee is likely to be less than $50.

Income theory approaches can rely on reasonable royalties based on assumed production over the useful life of the patented technology. The present value of the expected royalties could be the value of the patent. The useful life of a patent is limited by the 20 year term of a typical patent. But, also consider that one of the reasons inventors are given exclusive rights is to encourage them to reveal to others how their inventions work. The purpose of that is to encourage others to improve the invention or stimulate others to find even better solutions. If that happens the useful life of a patented invention can be much less than 20 years.

Certainly the value of a patent depends on some extent not only to its "inventiveness" in solving a problem but also on its quality or completeness. For example, others looking at a patented invention will examine it to see exactly what is covered in the claims. This may provide the insight to invent around it, that is, find a different approach just as good or find a better approach to solving the problem. In fact, they may even see that the invention provides a solution to other problems not envisioned by the original inventor and, so, not claimed as part of the invention. That, in fact, is exactly how the patent process is expected to work.

Usually, inventors file patent applications based on gut feelings about the value of their invention or for reasons entirely unrelated to financial gain like fame and the general good. The truth is that most patents don't become commercial successes.

A very important measure of a patent's value is made in a patent infringement lawsuit. A patent owner is entitled to the higher of a reasonable royalty or their lost profits when someone infringes their patent. Actuaries may be called upon as expert witnesses in the determination of these measures.

The minimum damages are set at a "reasonable royalty" level. Courts tend to look at what a hypothetical negotiation for the infringer's use of the patent would have produced in royalties if both parties had been willing participants in the negotiation. Absent an established royalty level, this reasonable royalty may be determined by evaluating the value added by the patented technology. As in the earlier example, if this value is $50 per unit, then a reasonable royalty may need to be less than $50.

Lost profits caused by the infringer will usually (when the patent owner has profits to lose) provide a higher damages value. In addition, other damage theories can come into play. Price erosion, for example, can occur when the infringer's competing presence in the market forces the patent owner to reduce the prices it would have otherwise been able to charge. The entire market theory might apply when the patent owner loses other sales of products related as part of a whole to products sold with the patented technology.

Patents in the insurance industry are a relatively new phenomenon. Eventually, however, the same patent value theories will come into play in determining whether or not to seek patent protection in the first place or whether or not it is worth asserting patent rights in a patent infringement lawsuit.