LawMeme is floating a trial balloon regarding the concept of liability insurance for copyright infringement as a potential response to the recent spate of lawsuits by the RIAA over file-sharing (RIAA Litigation Insurance: A (Very) Speculative Solution). A new organization, P2PFund, has beaten LawMeme to the punch, however, and is already soliciting supporters for such an approach.

The basic idea is simple. File sharers pool their money in order to fight lawsuits and pay damages in case they are targeted for an infringement action by the RIAA. Since the RIAA can't sue everybody, the pooled money should be sufficient to pay the damages the RIAA has been demanding. Simple, right?

However, if you are not a fan of the RIAA's lawsuits, this concept of liability insurance is not a good idea. There is a reason that insurance companies generally try to avoid covering willful or intentional acts - they would quickly go out of business. All such a system would do would be to reward the RIAA for initiating even more lawsuits, because when they hit a defendant with this proposed insurance they can go for the jackpot.

The LawMeme piece acknowledges that the RIAA could refuse to settle until the targeted individual reveals the extent of their insurance. I'm no expert on discovery process and I could be wrong, but it seems to me that the RIAA won't have to wait long once they've initiated a lawsuit because Federal Rules of Civil Procedure (FRCP) Rule 26 states:

(a) Required Disclosures; Methods to Discover Additional Matter.

(1) Initial Disclosures. Except in categories of proceedings specified in Rule 26(a)(1)(E), or to the extent otherwise stipulated or directed by order, a party must, without awaiting a discovery request, provide to other parties:

...
(D) for inspection and copying as under Rule 34 any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment that may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment.

Basically, I read this to mean that when a civil suit is filed, you must voluntarily disclose prior to a discovery request any insurance you have that might cover the potential claims. Nothing I am aware of prevents the RIAA from insisting on a settlement that takes into account the amount of insurance coverage, including insisting on damages beyond the covered amount.

The insurance company can fight the lawsuit, but that is a recipe for disaster for the insurance company and likely the defendant as well. The minimum statutory damages for each infringement is $750, and the RIAA has been claming at least 1,000 acts of infringement for those they are currently going after, which means $750,000 in damages, minimum. The statutory maximum for each infringement is $30,000 ... which translates into $30,000,000 for 1,000 infringing files. The lawyers for the insurance company can fight the case (which will itself be very expensive), but are highly likely to lose. On top of this, the RIAA will almost certainly be awarded lawyer's fees as well.

Another problem with buying such insurance is that it will make a defense of "innocent infringement" very, very difficult. Indeed, I would imagine that purchasing such insurance is more likely to be considered evidence of willful infringement, which means damages of up to $150,000 for each infringing file. I seriously doubt that judges are going to be sympathetic to such an insurance company or their claims. I can easily see damages set somewhere close to the maximum, given sufficient insurance coverage.

Consequently, given some decent facts and a non-sympathetic defendant, the existence of insurance would probably encourage the RIAA to go after the targeted individual in an actual lawsuit. The possibility of a large reward will incentivize precisely what the insurance is supposed to protect against.