In the spring of 1903, two independent inventors, Orville and Wilbur Wright, filed a patent application on a revolutionary technology for controlling a flying machine.  In that application they included pictures of Orville flying it[1].

The reason they provided pictures was to show the patent office that the invention actually worked.  At that time the US patent office was inundated with patent application on alleged flying machines.   They were all rejected.  The patent office does not grant patents on inventions that clearly will not work.  The Wright Brothers’ photos showed that theirs’ would.  Of course today, with innovation in photo technology, a photo might not be so compelling a form of evidence.

The requirement that an inventor be able to show that their patent pending invention works is part of what is called the “utility requirement” (i.e. 35 U.S.C. 101).  Inventors are rarely called upon make this demonstration, but if the examiner requires it, they have to in order to get a patent.

Demonstrating the utility of a physical invention is straightforward.  Follow the directions given in the patent, build it, and try it.  If one works, they all work.  It doesn’t matter who makes it, as long as there is sufficient guidance in the patent application for someone of “ordinary skill in the art” to reproduce the invention. 

Remember that patentable subject matter falls into one of four broad categories: machine, article of manufacture, composition of matter, or process.  The first three have obvious physical manifestations and, therefore, if required, the “build it and try it” approach can be used to satisfy a utility requirement.  Most process inventions involve physical steps (for example, the steps of combining materials) in order to produce a useful result (a new compound material).  Thus, a patent can be granted not only for the new composition of matter but for the process used to create it as well. The usefulness of the process is easily determined because it produces a measurable result – the new compound. However, even if it were a new process used to produce an old compound, it might still be patentable since the measure of the usefulness of the process would rely on the fact that it produced the compound – not that the compound was new.  But, underlying all of this is the additional requirement that in order for a new process to be patentable the result produced by the process must also be useful in that it provides a practical benefit or helps people complete real world tasks.  In patent-speak, it must produce a “concrete, useful and tangible result”.

An important distinction to have in mind throughout this discussion is that “usefulness” is not equivalent to “value”, “commercial value”, or “commercial success”.  So, a process is “useful”, for example, if it produces a useful compound, even if the process itself or the compound it produces is not a commercial success. 

We realize that the concept of “utility” is a difficult one to describe and understand because the common everyday meanings of the words used are often not applicable in exactly the same way in a patent examination.  Patent examination is a process with its own field of art.  It takes education and experience to apply it even to the level of “ordinary skill”.  With that said, it is with trepidation that we embark on a discussion of “utility” in the field of insurance business method patents.  But, we will do our best and hope to encourage comments, suggestions, and questions from our readers.

Evaluating the “utility” of an insurance business method process invention is made difficult by the fact that the ultimate result of the application of the insurance business method is the transfer of the financial consequences of a contingent event from one entity (the insured) to another entity (the insurer) for a premium.  Very basically, that “transfer” has some physical manifestations.  Broadly, insurance is itself a business method process.  However, the time has long since passed when a patent on the basic insurance process could be had.  Rather, the insurance business method patents being filed today relate to parts of the insurance business. 

A contingent event is a key component of any insurance process.  A contingent event is an event which is uncertain with respect to its occurrence, timing, or severity.  What makes the concept of “utility” difficult to evaluate is, precisely, this uncertainty in the insurance process.  While the “uncertainty” relates to individual insureds, insurance products relate to a multiple of insureds.  In this way an insurance company can spread or manage the financial consequences of the risk experienced by each individual.  Therefore, it would seem that the “utility” of insurance product inventions, in general, needs to consider the usefulness or practical benefit enjoyed by a multiplicity of insureds not the usefulness relative to any one particular insured.

With respect to any individual, insurance is “useful” in the sense that it stands ready to offset a financial loss created by the actual occurrence of a contingent event by the payment of a benefit amount.  That is, if you have automobile collision coverage and never have a crash, you will never have a claim under your policy.  In retrospect, you might think you didn’t need the coverage and it didn’t work.  On the other hand, if you did have a crash, you would have received a benefit, effectively transferring the financial consequences of your crash to the insurance company.  So, is insurance only useful when you need it?  Many people think that way.  Those of us in the insurance business do not.

Many improvements on the insurance process are being patented.  These take the form of what might be called sub-process business methods which address issues in underwriting selection, administration, premium calculation, claims processing, risk definition, and many other aspects of insurance.  All are designed to make these insurance processes better in some way, such as faster, cheaper, more effective, more efficient, broader, etc.  The true test, of course, of usefulness would involve a demonstration that the alleged result (e.g. faster, cheaper, …) was actually achieved as this would mean the process had a practical benefit with respect to some real world task. 

The utility requirement poses a challenge to those who would like to see patents granted directly on new insurance products instead of just on the technological inventions, such as novel computer systems, that enable them. Demonstrating that a new insurance product is useful and, therefore, works is a very different task than demonstrating that a technological invention works. 

Essentially, for something to work it must do what it was intended to do and what it was intended to do must be useful, that is, have some practical value.  Since, at the moment, insurance “product” claims are generally not allowed by the USPTO, any discussion of how to demonstrate an insurance “product” works is academic.  We’ll work ourselves back into this discussion should it ever look like insurance product claims may become a reality. (See sidebar on the recent In Re Lundgren decision)

However, one final point on this before we go.

Whether or not an insurance product works (meaning here the broad sense of doing what it was intended to do) can be a function of whether or not it is patented.  Consider the recent test of “free” auto insurance run by Creative Innovators Associates in association with VW and Nationwide. 

Creative Innovators Associates invented a new type of insurance product that allowed VW to provide one year of free auto insurance to anyone who bought particular models of their cars in a given test market.  Creative Innovators Associates has a patent pending on the underwriting process that allows VW to offer the product.  Until the patent issues, they are keeping the process secret. Hence they can offer the insurance product exclusively to VW.  Nationwide underwrote the insurance and VW paid the one year premium out of the extra profit they made in selling more cars.  They sold more cars because they were the only ones that could offer the free insurance due to their exclusive license.  

Without a patent, other car companies would eventually figure out the underwriting process and be able to offer free insurance as well.  Once enough companies offer it, the relative advantage will disappear, the increased car sales to any one manufacturer will disappear, car companies will no longer be able to pay for the insurance, and the “free” insurance product will no longer work.   With a patent, however, Creative Innovators Associates can enforce exclusivity even after others figure out how to underwrite it and, hence the “free” insurance product will continue to work for them.

In order to get a patent, an inventor must at least theoretically be able to show that their invention works.  With physical inventions, this merely involves producing at least one working example.  With insurance inventions, however, “working” involves a very large number of individual instances of the product “working” together to produce a concrete, useful, and tangible result.  This is due to the uncertain nature of the contingent events at the core of every insurance product which makes actual demonstrations of utility problematic.  One of the challenges facing those that would like to directly patent new insurance products is finding a practical way to demonstrate that their new products actually fly.