Managing the risks of software development with software development insurance

The software development industry includes all computer professionals who write, alter, test, and support software of any kind. If your business relies on software, you likely face many of the associated business risks. Managing software development risks is crucial as the potential consequences can be devastating for businesses.

So, what are the risks of software development? And how can business insurance help you manage the risks more effectively?

Common risks for software development companies

Regardless of the product produced and the targeted industry, there are challenges that all software development companies face on a daily basis. There are many different risk management strategies you can use to mitigate software development risks. Let’s take a look at a few of the most common.

Cyber attacks

Cybercrime is on the rise, and software companies are a perfect target due to the amount of sensitive information that they store. Data breaches and other cyberattacks can lead to stored information — Social Security numbers, credit card information, etc. — being compromised, leaving the company open to serious litigation. What’s more, damage caused by cyberattacks to third-party software or other services that the software relies on can be grounds for a lawsuit.

Errors and omissions

Even small bugs and glitches in software can cause major disruptions for customers. If a software developer makes a mistake when creating code that results in a critical error or glitch, the customer may have grounds to sue the software company. At the end of the day, software developers are human, so mistakes should be expected.

Dissatisfied customers

Customers often rely heavily on the software they purchase. While this is great for business, it can lead to many risks for software companies. For example, any downtime the software experiences could lead to a customer losing money. If the software doesn’t function as the customer expects, they may take legal action to seek damages. In many cases, software development contracts also include strict deadlines for delivering certain features or installations. So, if these milestones aren’t met, dissatisfied clients may pursue compensation for project delays or business disruptions.

Disgruntled former employees

In recent years, it has become more and more common for employees to sue their former employers. It’s not uncommon to see an employee feel slighted and decide to sue their former employer for wrongful termination, harassment, or discrimination. The software development industry is not untouched by this issue. For example, a 2024 report by the EEOC highlighted that discrimination charges in the high-tech sector were more likely to involve age, pay, and genetic information discrimination than in other sectors.

Copyright infringement

Software development is an industry of very strong competition. With so many companies focusing on the same demographics and offering similar services, avoiding copyright and intellectual property infringement can be difficult. It’s important to both protect your company’s intellectual property and ensure you don’t infringe on that of a competitor. A copyright infringement lawsuit can cost your company hundreds of thousands (if not millions) of dollars.

Property damage

Software developers use expensive computers, servers, hard drives, and other physical equipment. One of the most common risks that software companies experience is equipment failure. Whether it’s due to an unforeseen circumstance, such as flooding, or an employee spilling coffee on a server, it’s important to be prepared for property damage.

Additionally, if you have a physical office, there’s always a chance that your property could be damaged by weather events, vandalism, burglary, or fire. These events could cause you to have to replace equipment and lose revenue due to system downtime.

Workplace injuries

Any company with employees should be prepared to face the costs of covering workplace injuries or illnesses. Obviously, being a software developer isn’t a very physically risky job. However, sitting for extended periods with constant repetitive hand motions can still result in workplace injuries. 

Theft

Employees often have access to both company and customer data, which puts your company at risk of employee theft. Employee theft is one of the most severe risks since internal actors have access to some of the most sensitive and potentially damaging information.

Software development businesses are also at risk of theft and data breaches from external threats. Third parties may infiltrate your company’s systems and steal data, money, securities, or just about anything else available.

Why do you need insurance to protect your software development company?

Software development companies face a wide range of risks, from cyberattacks and coding errors to server outages and employee theft. Any of these events can lead to massive financial losses, reputational damage, and even business closure in extreme cases. The reality is that most software development companies don’t have the resources to absorb these costs on their own. This is where business insurance comes in. With insurance, you can mitigate these risks by transferring the financial burden to the insurer. This gives your company the support it needs to recover from unexpected setbacks without jeopardizing its future.

Recommended coverage for software development companies

As a software development business grows, the number and complexity of the coverage needed will undoubtedly change. However, whether you are an independent developer or a rapidly growing tech startup, your insurance portfolio should include the following policies.

Commercial general liability insurance

A staple policy that any business owner should have is commercial general liability (CGL) coverage, which will protect your company from third-party bodily injury and property damage claims arising from business operations. For example, if a client visits your office and slips and suffers an injury, a CGL policy will cover defense and potential settlement costs. Additionally, a general liability policy will insure against claims alleging libel, slander, defamation, and invasion of privacy. In many cases, these policies also cover copyright infringement.

Technology errors and omissions (E&O) insurance

One of the most vital insurance policies for software developers, tech E&O insures the company if professional services cause a customer to lose revenue or incur unforeseen expenses. This policy will also address claims arising from the failure to complete a project on time, errors in the code or system, or underperformance of written contractual expectations. Essentially, every software company should have a tech E&O policy in place.

Cyber liability insurance

Software companies are highly vulnerable to cyberattacks. Cybercrime is a side effect of doing business in an “online” environment. If the software company collects sensitive data from customers and stores it, a comprehensive cyber insurance policy is needed. This coverage will protect against lawsuits resulting from data breaches and other types of cyberattacks and address mandatory remediation expenses. In addition, the cyber policy will be able to cover defense costs, regulatory fines, and even investigations dedicated to determining how the breach or cyberattack occurred and what preventive measures can be taken.

Directors and officers (D&O) insurance

This policy insures the software company’s directors, officers, and other top executives from lawsuits alleging misrepresentation, mismanagement, and breaches of fiduciary duties. D&O policies allow executives to do their job without putting their personal assets on the line. 

The software industry has seen many examples of directors and officers being sued based on management decisions they made that shareholders, customers, and even other board members believed negatively affected the company. D&O insurance protects the company and the personal assets of the leaders in such cases. Having D&O insurance is also an attractive recruitment tool for hiring a top-shelf executive and often a mandatory stipulation for capital venture firms looking to invest.

Commercial property insurance

If your company maintains a physical office space, then commercial property insurance is an absolute must. This policy will protect all vital business property, including equipment, furniture, inventory, and any improvements made to the office. If you are a software engineer who works from your private residence, some limited coverage may be available from your homeowners’ insurance policy. However, the scope will not be as comprehensive as a traditional commercial property policy. For example, a homeowner’s policy restricts the coverage amounts for property primarily used for business purposes.

Workers compensation insurance

Workers compensation coverage is mandated by law in every state except Texas for companies with employees. Workers compensation covers the costs associated with employee injuries and illnesses that occur in the workplace. This includes medical expenses, lost wages, disability benefits, and even funeral costs.

Employment practices liability insurance (EPLI)

Another recent trend in the world of tech and software development is employees suing their companies for discrimination — especially related to equal pay for all genders — and wrongful termination. EPLI protects software development companies from these claims and others, such as sexual harassment, negligent evaluation, wrongful demotion, or failure to promote.

Commercial crime insurance

Commercial crime coverage protects the software company from crimes committed by both employees and third parties, such as embezzlement and fraudulent transactions.

How much does software development insurance cost?

As there are many different types of insurance coverage to invest in to protect your software company, it is difficult to estimate the exact cost. Here are some of the main factors that influence the total cost of your software development insurance:

• Type of coverage selected
• Policy terms (limits, deductibles, and additional endorsements can all influence your premiums)
• Your company’s location
• Size of your organization — whether you’re a startup or an independent contractor, the number of employees you have will directly affect your software development insurance premiums
• Previous claims history
• Projected revenue within the next year
• Services offered, as well as their associated risks
• Data sensitivity (financial information or health records can increase cyber liability costs)
• Current security measures in place

Generally, when it comes to determining premiums, the same rules apply for most industries. Embroker believes in giving our clients better choices using data and transparency.

Highly publicized examples of software development insurance claims

GitLab

In 2024, GitLab was sued by shareholders in a securities class action. The suit alleged that GitLab overstated its ability to develop AI features, which led to an initial inflated stock value.

Anaconda Inc. vs. Intel Corporation

A software developer called Anaconda Inc. filed a copyright infringement lawsuit against Intel Corporation in 2024. The claim accused the chip making giant of using Anaconda’s software to develop AI platforms after its license had expired. The lawsuit alleged that Intel violated Anaconda’s intellectual property rights.

Freightmate AI

In March 2025, a freight and customs brokerage company called Flexport sued Freightmate AI for copyright infringement. Flexport claimed that Freightmate AI unlawfully used its copyrighted software to develop products and harm Flexport’s reputation.

Protect your software business with the right insurance policy

Software development companies face a wide range of risks that can quickly spiral into costly legal and financial consequences. While insurance is undoubtedly your best defense against these risks, getting the right policy isn’t so simple. So, how do you make sure your software company is properly insured?

Working with a partner who understands the unique risks and exposures related to tech startups is your best course of action if you want to obtain the proper coverage for the best price. This is where Embroker comes in. Get a custom quote for your business today and take the first steps toward protecting your software development business.