Managing the Risks of Software Development with the Right Insurance ProgramInsurance Explained
The software development industry includes all computer professionals who write, alter, test, and support software of any kind. And if you are running any type of modern company, there is a good chance that your business is very much reliant on software. And it’s not strictly technology companies that rely on software to run their businesses. According to a Gartner report, worldwide IT spending is projected to total $3.79 trillion in 2019.
With software development becoming so vital, it’s easy to understand how these types of companies could face very significant business risks. Not only are the clients of these companies absolutely dependant on their products and services, but the expectations to perform well that are set for these products and companies are often staggering as well.
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, among them:
Dissatisfied Customers: Customers are often incredibly reliant on the software they purchase. While this is great for business, it also leads to many risks for software companies. For example, any downtime the software experiences could lead to a customer losing money and take legal action seeking damages. Also, if a new feature in the software was not installed contractually before a certain date, a suit could result in generating unforeseen costs and obligations.
Disgruntled Former Employees: Employees suing their former companies is becoming a very common occurrence, especially in the world of startups. It’s not uncommon to see an employee feel slighted and decide to sue their former employer for wrongful termination based on a variety of reasons.
Cyberattacks: Cybercrime is on the rise. Software companies are a perfect target for cybercriminals because of the type of sensitive information that they often store. Data breaches and other cyberattacks can lead to stored information, such as Social Security and credit card numbers, being compromised, leaving the company open to serious litigation. Even damage caused by cyberattacks to third-party software or other services that the software relies on can be grounds for a lawsuit.
Copyright Infringement: Software development is an industry in which there is severe competition. With so many companies focusing on the same demographics and offering similar services, avoiding copyright and intellectual property infringement can be difficult. And even if you aren’t infringing on anything, that certainly doesn’t stop competitors from claiming that you have.
Property Damage: If you have an office, there’s always a chance that your property could be damaged by weather events, vandalism, burglary, or fires. Also, an employee spilling their coffee on your server and frying it could also occur. Consequently, these events or mishaps could lead to replacing some seriously expensive equipment as well as the loss of revenue caused by the downtime.
Workplace Injuries: Obviously, being a software developer isn’t a very physical job. However, sitting for extended periods with constant repetitive hand motions can result in workplace injuries. Consequently, some possible debilitating risks could be suffered by an employee.
Theft: Employees often have access to both company and customer data which makes it tempting for them to steal. And because of the online nature of the software development business and the cyber risks that are associated with this industry, third-parties are looking for ways to infiltrate company systems and steal data, money, securities, and anything else that is available.
Highly-Publicized Examples of Insurance at Work for Software Companies
- A motion filed against Oracle represents more than 4,200 women and alleges that female employees were paid on average $13,000 less per year than men doing similar work. See: Oracle systematically underpaid thousands of women, lawsuit says
- A suit brought against Salesforce alleges that the company did business with now-defunct sex-trafficking website Backpage and built customized business tools as the “backbone of Backpage’s exponential growth.” See: Salesforce Stock Falls After Lawsuit Is Filed
- Crawford & Co, a US claims handling company, sued Cognizant saying the IT services provider failed to staff, manage, and implement a software project at the company and caused it significant problems. See: Cognizant sued by US client over implementation issues
Recommended Coverage for Software Development Companies
As the software development business grows, the number and complexity of the coverage needed will undoubtedly change. However, whether you are an independent developer with several offices and a growing staff or a startup, your insurance portfolio should include the following:
Commercial General Liability Insurance: A staple policy that any business owner should have, commercial general liability (CGL) coverage will protect your company from third-party bodily injury and property damage claims arising from the business operations. For example, a client could be visiting the company’s office, during which time the client stumbles and suffers an injury. A CGL policy will cover defense and potential settlement costs if the client decides to file a claim. In addition, a CGL will insure against claims alleging libel, slander, defamation, and invasion of privacy as well as copyright infringements originating from the company’s advertisements.
Technology Errors & Omissions Insurance: Easily 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 incurs unforeseen expenses. This policy will also address claims arising from the failure to complete a project on time, errors in the code or system developed or nonperformance of written contractual expectations.
Cyber Liability Insurance: Software companies are vulnerable to cyberattacks, which comes with the nature 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 that can result from data breaches and other types of cyberattacks as well as 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 & Officers Insurance: This insures the company’s directors, officers, and other top executives from lawsuits alleging misrepresentation, mismanagement, and breaches of fiduciary duties. 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. Consequently, D&O insurance will protect the company and the personal assets of the leaders in such cases. Having the right D&O insurance is also a great recruitment tool to hire a top-shelf executive and it’s also a mandatory stipulation for capital venture firms who might want to invest.
Commercial Property Insurance: If the company maintains a commercial office, then commercial property insurance is warranted, which will protect all vital business property, including equipment, furniture, inventory, any improvements made to the office as well as loss of earnings. If you are a software engineer that 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, such as coverage amounts for property primarily used for business purposes is restricted under a homeowners’ policy as well as no coverage for another storage site or loss of revenue. Therefore, a commercial policy should be the preferred course.
Workers Compensation Insurance: Even if you’re the only employee in your software development business, you still need workers compensation coverage since it is mandated by law in every state except Texas once you have employees. This policy will cover the costs related to your employees’ work-related injuries and illnesses by paying medical expenses and lost wages.
Employment Practices Liability Insurance: Another trend we’ve seen recently 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 will protect the company in the event of such 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 both by the employees and third-parties, such as embezzlement, and fraudulent transactions.
Most importantly, working with the right partners who understand the unique risks and exposures related to tech startup insurance is vital if you want to obtain the proper coverage for the best price.
If you need more help or information about protecting your business, you can reach out to our team of expert brokers to learn more.
Even on the advice of a broker, how do you actually know you’re paying a fair price for your Directors and Officers (D&O) coverage? The answer lies in due diligence plus asking your insurance broker the right questions. Here’s the key advice to consider: Know your average costs of D&O …