Insurance for Software Bugs: What Counts as Negligence?

Software bugs are inevitable. What isn’t inevitable is the fallout: lost revenue, customer claims, regulatory scrutiny, and reputational damage. When something breaks, the big question quickly becomes: was it just an error… or was it negligence? That distinction matters because it can affect liability, contract disputes, and whether an insurer treats the incident as a covered “professional error” or a foreseeable failure that should have been prevented.

This guide explains how negligence is typically assessed in software-related claims, what evidence tends to matter, and how businesses can reduce risk through contracts, process, and the right mix of insurance.

First: a quick disclaimer

This article is general information, not legal advice. Negligence is fact-specific and depends on jurisdiction, contracts, and the circumstances of the incident.

Why negligence matters in software bug claims

A bug can trigger multiple types of loss:

• A customer suffers financial loss because your system miscalculates, fails, or corrupts data.

• A third party is impacted (for example, a customer’s customer).

• A security vulnerability is exploited, leading to a data breach.

• A critical outage causes business interruption.

• A defective update damages hardware or connected systems.

When a claim lands, the dispute often centres on whether you met the expected standard of care. If you did, it may be treated as an unfortunate professional error. If you didn’t, the claimant may argue negligence and seek damages, and your insurer will look closely at policy terms, exclusions, and how the incident arose.

What is “negligence” in plain English?

Negligence is usually framed as a failure to take reasonable care, resulting in foreseeable harm. In software contexts, it’s less about “you shipped a bug” and more about whether your approach to design, testing, security, and change control was reasonable for the type of system and the risks involved.

A helpful way to think about it is:

• Error: A defect slips through despite reasonable controls.

• Negligence: A defect slips through because reasonable controls were missing, ignored, or clearly inadequate.

The standard of care: what’s “reasonable” for software?

The “reasonable” standard is not one-size-fits-all. It tends to be judged against:

• The nature of the product (consumer app vs safety-critical system)

• The industry (fintech, healthcare, aviation, insurance, etc.)

• The potential severity of harm

• The promises made in your contract, marketing, and SLAs

• Common industry practice (secure development, testing, monitoring)

• Your own internal policies (if you have them, you’ll be judged against them)

A bug in a hobby app is not assessed the same way as a bug in payroll software, medical device firmware, or a trading platform.

Common scenarios: when a bug is more likely to be treated as negligence

1) Ignoring known defects or warnings

If the issue was known (or strongly suspected) and shipped anyway, negligence arguments become stronger. Examples include:

• A bug is logged as “high severity” but deferred without a documented risk decision.

• A security scanner flags a critical vulnerability and it’s ignored.

• A customer reports a reproducible issue and it’s not triaged.

Insurers and claimants will look for evidence of awareness: tickets, emails, Slack messages, incident reports, and release notes.

2) No meaningful testing for a high-risk change

Testing doesn’t need to be perfect, but it should be proportionate.

Negligence is more likely where:

• There is no test plan for a major release.

• No regression testing is performed on core functions.

• A hotfix is pushed straight to production with no peer review.

• There is no staging environment or rollback plan.

For high-impact systems, claimants may expect unit tests, integration tests, UAT, and documented sign-off.

3) Weak change control and release management

Many costly incidents are not “mysterious bugs” but process failures:

• Deployments occur without approvals.

• Production access is too broad.

• Changes are not tracked.

• Versioning is unclear.

If you can’t show what changed, when, and who approved it, it becomes harder to demonstrate reasonable care.

4) Poor security hygiene leading to exploit

A software bug that becomes a breach can trigger both negligence and regulatory issues.

Negligence arguments often focus on:

• Failure to patch known vulnerabilities

• Insecure defaults

• Weak authentication or access control

• Lack of encryption for sensitive data

• No monitoring or alerting for suspicious activity

Security expectations vary by sector, but the baseline has risen significantly in recent years.

5) Overpromising in contracts, proposals, or marketing

Negligence claims sometimes piggyback on “you promised X”:

• “Bank-grade security” claims without evidence

• Uptime commitments without resilient architecture

• “Guaranteed accuracy” for calculations that weren’t validated

Even if the underlying bug was accidental, exaggerated promises can make the failure look more blameworthy.

6) Inadequate documentation and handover

For bespoke development and integrations, lack of documentation can be framed as negligent delivery:

• No user guidance for critical workflows

• No admin/runbook for support

• No clear limitations or assumptions

If the customer misuses the system because instructions were unclear, disputes can escalate quickly.

When a bug is less likely to be negligence

Not every incident is negligent. Factors that tend to help show reasonable care include:

• A documented SDLC (software development lifecycle) and secure development practices

• Peer review and change approvals

• Testing evidence (even if not exhaustive)

• Monitoring and incident response procedures

• Clear communication and timely remediation

• A sensible risk acceptance process for known issues

If you can show you acted like a competent professional team, a bug can be treated as an unfortunate defect rather than a reckless failure.

Evidence that matters in a negligence dispute

Whether you’re defending a claim or making a notification to insurers, evidence is crucial. Common items include:

• Contracts, statements of work, SLAs, and scope documents

• Requirements and acceptance criteria

• Ticket history (Jira, Azure DevOps, etc.)

• Code review records and approvals

• Test plans and test results

• Release notes and deployment logs

• Security scan outputs and patch records

• Incident timeline, root cause analysis, and remediation plan

• Customer communications (what was promised and when)

A well-run incident response process can materially reduce the “negligence” narrative.

How insurance typically responds to software bug claims

Different policies respond to different parts of the loss. The right combination depends on what you build, who you serve, and how contracts are structured.

Professional Indemnity (PI) / Technology E&O

This is often the core cover for software businesses. It can respond to allegations that your professional services or software caused a client financial loss.

PI/E&O claims may include:

• Defective code or failure to meet specification

• Negligent advice, design, or implementation

• Missed deadlines causing client loss (depending on wording)

• Breach of professional duty

Key watch-outs:

• Contractual liability (agreeing to liabilities beyond negligence)

• Fitness for purpose warranties

• Exclusions for deliberate acts or known defects

• Retroactive dates and “claims-made” conditions

Cyber insurance

Cyber policies typically focus on security incidents: breach response, forensics, notification, PR, and sometimes business interruption.

Cyber may respond where a bug is exploited (for example, a vulnerability leading to unauthorised access). It may also provide access to incident response vendors.

Key watch-outs:

• Security minimum standards and warranties

• Exclusions for unpatched known vulnerabilities

• Waiting periods for business interruption

• Sub-limits for certain events (e.g., ransomware)

Public and Products Liability

If a software defect causes bodily injury or property damage (rare, but possible with IoT, industrial control, medical tech, or embedded systems), liability policies may be relevant.

However, pure financial loss is usually the PI/E&O domain.

Directors & Officers (D&O)

If the incident leads to allegations about management decisions, investor claims, or regulatory action against directors, D&O may be relevant.

Business interruption (BI)

Traditional BI is usually tied to physical damage. Cyber BI is more relevant for software outages caused by cyber events. Some tech E&O wordings also include limited cover for certain interruption losses.

Contract terms that can increase negligence exposure

Even if you have insurance, contract terms can make claims harder to defend or settle.

1) Unlimited liability clauses

If you accept unlimited liability, a single incident can become existential. Many software suppliers negotiate caps (often linked to fees paid).

2) “Fitness for purpose” and broad warranties

These can turn a bug into a strict obligation rather than a negligence-based dispute.

3) Indemnities that go beyond your control

Indemnities for third-party losses can create exposure that doesn’t map neatly to PI cover.

4) Aggressive SLAs without architecture to match

If you promise 99.99% uptime but run a single-region setup with no failover, a claimant may argue the risk was obvious.

Practical steps to reduce negligence risk (and strengthen insurability)

You don’t need a perfect process. You need a defensible one.

1) Document your SDLC and stick to it

• Define how features move from requirement to release

• Require peer review for production changes

• Keep audit trails

2) Make testing proportionate and provable

• Unit tests for core logic

• Regression tests for critical workflows

• UAT sign-off for major releases

• Keep evidence (test reports, screenshots, logs)

3) Treat security as part of quality

• Patch management and dependency scanning

• Secure configuration baselines

• MFA and least-privilege access

• Monitoring and alerting

4) Use risk acceptance properly

When you ship with known issues:

• Record severity and impact

• Document the business decision

• Put mitigations in place

• Communicate limitations where appropriate

5) Tighten your contracts and scope

• Clear deliverables and acceptance criteria

• Reasonable liability caps

• Exclusions for consequential loss (where appropriate)

• Clear responsibilities for client-side configuration and data

6) Incident response: speed and transparency

A fast, structured response can reduce damages and show professionalism:

• Contain the issue

• Communicate clearly (without admitting liability prematurely)

• Provide workaround/rollback

• Perform root cause analysis

• Prevent recurrence

FAQ: quick answers business owners ask

Is any software bug negligence?

No. Bugs happen. Negligence is about whether you took reasonable care given the risks and what you promised.

If we follow best practice, are we “safe”?

It reduces risk significantly, but claims can still arise. Insurance and good contracts are still important.

Does admitting fault void insurance?

It can complicate claims. Many policies require you not to admit liability or agree settlements without insurer consent. Always check policy conditions and notify early.

What if the client’s environment caused the issue?

That’s common in integrations and bespoke deployments. Clear scope, responsibilities, and documentation help demonstrate where control sat.

Can cyber insurance cover a bug?

It may, if the bug leads to a covered cyber event (like unauthorised access). For pure performance/functional defects causing financial loss, PI/E&O is usually the starting point.

Closing: bugs are inevitable, negligence is optional

The difference between a defensible mistake and a negligence allegation is often process, documentation, and communication. If you can show you acted reasonably—tested proportionately, managed changes, handled security responsibly, and responded quickly—you’re in a far stronger position with customers, regulators, and insurers.

If you build, deploy, or maintain software for clients, it’s worth reviewing your contracts and your insurance programme together. A well-structured PI/Technology E&O policy, supported by cyber cover where relevant, can be the difference between a painful incident and a business-ending one.