Major sneaker brands have capitalized on new trends in technology and social media to hype sneaker culture. As sneakers become more popular, sneaker collections increase in value, thus increasing financial exposure for collectors and other entities in the sneaker industry. One might first think of theft, authentication, fire, floods, or market valuation as the general risks associated with sneaker collections. But many sneaker companies have made headlines over the past few years with numerous lawsuits against other sneaker companies and entities with issues ranging from traditional patent battles to exhaustive fights against counterfeiters. Often overlooked by collectors and sneaker companies alike, insurance can and does play a critical role in helping both collectors and companies faced with unexpected liability related to sneaker culture.
Given the context of how much money is at stake in the industry—nearly $72.2 billion currently and expected to reach $100 billion by 2026—it should come as no surprise that sneaker companies are using intellectual property (“IP”) law to protect their assets. For example, in early 2022, a large shoe manufacturer filed a lawsuit against an online sneaker resell marketplace, asserting claims for trademark infringement of the shoe manufacturer’s non-fungible tokens (“NFTs”), counterfeiting, and false advertising after a sneaker collector and reseller bought 38 pairs of counterfeit sneakers from the resell marketplace. The same large shoe manufacturer also sued a major athletic apparel retailer in January 2023 for alleged infringement of footwear patents. Sneaker companies or other entities on the receiving end of IP lawsuits should be able to leverage their IP or commercial general liability (“CGL”) policies for insurance coverage for defense costs in IP lawsuits related to sneakers and their director’s and officer’s (“D&O”) policies for any downstream lawsuits against executives of sneaker companies.
While IP insurance, which protects a business from allegations of infringement on another business’s intellectual property, may be the obvious source for coverage for IP claims related to sneakers, coverage may also be viable under a CGL policy. Most CGL policies do not explicitly include patent infringement coverage. In fact, most include an IP exclusion that expressly excludes patent infringement coverage, but insureds may still be able to secure coverage. Most IP lawsuits are conjoined with other allegations, such as unfair competition which some courts have found to be fundamentally the same as an asserted trademark infringement claim, that may implicate coverage under the CGL policy that the insurer acknowledges and defends. A claim for patent infringement may also be covered under “advertising injury” that falls outside the scope of the policy’s IP exclusion. Willful acts of infringement are generally not covered though; the infringement must be inadvertent.
Relatedly, D&O insurance can cover claims against individual business leaders, such as directors or officers or certain company executives, arising from the actual or alleged wrongful acts, such as failing to adhere to state or federal laws, unethical practices, or fiduciary duty mismanagement, in sneaker-related lawsuits.
As sneakers become increasingly more valuable, individual collectors should also consider insurance coverage options. Traditional homeowners insurance typically covers personal property, including sneakers. But a traditional homeowner policy does not cover authentication issues, such as the counterfeit issue in the lawsuit mentioned earlier, or other risks unique to sneaker collecting and investments.
To that end, sneaker collectors can consider sneaker insurance, which insures against a broader range of risks than traditional homeowners’ policies. Homeowners policies often exclude coverage for property damage resulting from or arising out of flooding, whereas sneaker insurance typically provides some coverage for flood damage. Larger collections, in particular, are more vulnerable to potential disasters, making purchasing comprehensive insurance a necessary step in protecting a collector’s investment. Policies tailored for sneaker collections also provide coverage for sneakers lost and stolen during shipping, delivery, and travel–losses also not covered under traditional homeowners policies — allowing collectors to profit from their investment through resell while decreasing exposure to the risks of shipping and delivery of valuable sneakers. Another advantage to sneaker insurance is that the sneakers are valued and authenticated during the underwriting process and insured at replacement cost, rather than actual cash value, allowing the collector, in most cases, to avoid incurring a loss because of depreciation or a decline in market value for the sneaker.
Sneaker collectors, however, should understand that sneaker insurance is an emerging market, and options are somewhat limited. So policyholders may have to pay high premiums for coverage, particularly because insurers in the sneaker industry are likely attuned to the nuances of the sneaker market and may tie premiums to market fluctuations.
Insurance is a great way to mitigate and hedge against the risk of unforeseen losses in the sneaker industry. Sneaker companies and collectors should consult with experienced coverage counsel to carefully consider all insurance options to protect their assets and investments.