Insurance for Software Companies

Running a software business can be highly rewarding, but it also comes with significant risks. As a business owner, you must manage potential liabilities, and having insurance is crucial in mitigating these risks.

Insurance may help cover expenses if your business faces a lawsuit, protecting you from financial losses. For a small monthly fee, insurance policies such as General Liability and Commercial Property insurance can safeguard your business from lawsuits and property damage, ensuring minimal operational disruptions.

Moreover, business interruptions can lead to income loss, which insurance may also cover. Viewing insurance as an investment rather than an expense is essential because it provides a safety net when needed.

However, it's vital to understand the specifics of each policy, including what is and isn't covered, to ensure comprehensive protection for your business.

Software companies face a wide array of risks that can threaten their operations and financial health. Key risks include:

1. Data Breaches and Cyberattacks: These incidents can compromise sensitive client information, leading to costly legal battles and reputational damage. For example, if a hacker gains access to user data, the company could face lawsuits and regulatory fines.

2. Software Errors and Failures: Bugs or performance issues can disrupt client operations, resulting in breach of contract claims. If a business-critical application fails, clients may seek damages for lost revenue or productivity.

3.Intellectual Property Disputes: Software companies must navigate complex intellectual property laws to avoid infringing on patents or copyrights. If a competitor claims infringement, the company could face expensive litigation.

4.Business Interruptions: Unforeseen events such as power outages, natural disasters, or server failures can halt operations, leading to significant income loss. For instance, a data center outage could prevent clients from accessing a cloud-based service.

5.Client Misuse or Misconfiguration: Clients might misuse or incorrectly configure software, leading to performance issues or security vulnerabilities. The software company could be blamed for these issues, even if they are not directly responsible.

6. Regulatory Compliance: Keeping up with varying international regulations regarding data privacy and software standards is crucial. Non-compliance can result in hefty fines and legal complications.

7. Employee-related Risks: High turnover rates in the tech industry can lead to loss of intellectual capital and operational disruptions. Additionally, employee errors or omissions can expose the company to liability.

Insurance policies such as General Liability, Professional Liability (E&O), Cyber Liability, and Business Interruption Insurance can help mitigate these risks by covering legal expenses, financial losses, and other related costs, ensuring the company’s resilience and stability.

The cost of insurance for software companies varies widely based on several factors. Key elements influencing premiums include the company’s size, the nature of its software products, the number of employees, annual revenue, and the specific risks associated with its operations.

For smaller software companies or startups, basic coverage such as General Liability and Cyber Liability insurance is generally more affordable. As the company grows or handles higher-risk activities—such as developing high-value software, managing sensitive client data, or operating in highly regulated industries—premiums will increase.

For instance, a small app developer may have lower premiums compared to a large enterprise software provider with extensive data security needs.

Additional factors include the company’s claims history, coverage limits, and any additional policies required, like Professional Liability (E&O) or Business Interruption Insurance.

Larger firms or those with significant exposure, such as cloud service providers or companies with complex intellectual property portfolios, often face higher premiums due to the increased risk and the need for specialized coverage.

Working with an insurance provider experienced in the tech sector can help tailor coverage to specific needs and provide more accurate pricing.

Software publishers, like any other information services business, need more than just one little coverage to properly protect the business.

One way to bundle your insurance, which will not only save you money but also give you some extra coverages you might not otherwise consider, is to have a Business Owner’s insurance policy also known as a BOP. A BOP will start out with two main coverages, General Liability and Commercial Property insurance. So, it will cover your lawsuits related to bodily injury and property damage, as well as property coverage for physical damage from things like fire, wind, and theft.

Being able to have one policy to cover both of these critical coverage parts is helpful because you know where to look to find the coverage. While a BOP is important for any information services company to purchase, there are some other essential coverages as well.

You should consider also carrying Professional Liability insurance because you are in a profession where you give advice and do consultations. A customer could sue you and allege that you were negligent when doing your job and it caused them financial hardship.

You don’t want to get into a situation where someone sues you and you have to spend all of the profits you have made in the last 5 years on a lawyer, not to mention whatever settlement or judgment they may be awarded.

Also, if your company is big enough to have a board of directors and officers, it is important that you also look into Directors and Officers (D&O) insurance to help protect their personal assets.

The internet has truly changed our world and the way we do business. Almost every single business has a risk of being attacked in some way through the internet. As an IT software company, you have a huge exposure when it comes to Cyber Liability.

There are two types of Cyber Liability insurance and as a business owner, it is critical that you have coverage for both. Since you offer internet software and services you probably take credit card payments from your customers, right? If you do, then you have to use the internet to do so, so if a hacker is able to get into your system and steal your clients’ credit card numbers, this would be considered a first-party Cyber Liability claim.

It will pay for client notification, credit monitoring for those affected, and even cyber-extortion which is on the rise. On the other hand, and maybe more important for your application software business, is third party Cyber Liability.

This applies when your customers’ system is hacked and they blame it on your software. Cyber Liability in this instance will almost act like E&O insurance since it could be considered negligence on your part if it is found to be your fault. It will pay for attorney fees, court costs, and any judgments or settlements awarded to the plaintiff.

Regardless of the size of your business and what type of software or services you provide, insurance is never a bad idea.

Due to the overwhelming amount of risk any information technology services or software business can face, it is vital that you carry insurance, and make sure you have the right coverages and policies in place. The chance that you will have a claim alleging negligence or property damage is pretty high since you are dealing with customers on a daily basis.

A few of the types of software and services companies that should have insurance include but are not limited to any kind of Information Technology Services companies, Information Technology Software companies, Browser Software companies, Search Engine Software companies, VOIP or Satellite Software companies, Online Financial Services companies like QuickBooks or Mint, Supply Chain Management Software developers, and Customer Relationship Management (CRM) Software like Dubsado.

If you are developing new software, working for a business and handling their internet services, providing consulting for any other business, or just simply helping people learn how to utilize information technology you are at a risk for a lawsuit. Not to mention, if you are developing software and don’t want it to get destroyed, it would be a good idea to insure that as well.

There should be no question as to whether or not your business needs insurance because you have a higher risk than most businesses, but even the smallest business that has minimal to no risk can have the unthinkable happen. Even if you have the most top-notch safety programs in place, human error is a real thing and in the information technology services and software industry, it can cause major problems.

A lawsuit will surely be coming your way if a client is impacted financially by something to do with your services. Be prepared by having the right insurance in place.