Top Claims Directors of Software Companies Face (and How to Reduce Them)

1) Professional Indemnity (PI) claims: “Your software caused us loss”

What it looks like

• The software didn’t perform as specified
• A feature was delivered late or not delivered at all
• An integration failed and caused downtime or data issues
• The solution was “not fit for purpose”
• The client relied on your advice and suffered financial loss
• Your team’s error caused regulatory exposure (e.g., GDPR issues)

Typical triggers

• Vague or over-promising scopes of work
• Poor change control (scope creep without signed variation orders)
• Weak acceptance criteria and testing documentation
• Reliance on third-party APIs or vendors without clear contractual allocation of risk
• Misalignment between sales promises and delivery reality

Why these claims escalate

• What was promised?
• What was delivered?
• What did the client sign off?
• What evidence exists of testing, acceptance, and change requests?

Risk reduction controls

• Tight Statements of Work with measurable acceptance criteria
• Change control that requires written approval and pricing/timeline impact
• Clear limitation of liability clauses (aligned with your insurance)
• Documented QA and UAT sign-off
• A “no verbal commitments” rule for sales and account teams

2) Cyber claims: ransomware, business email compromise, and data breaches

What it looks like

1. Your own systems are compromised (first-party loss)
2. You suffer a breach that impacts client data (third-party liability)

• Ransomware encrypting production systems
• Compromised admin accounts (especially with weak MFA)
• Business Email Compromise (invoice fraud / payment diversion)
• Credential stuffing attacks on customer portals
• Supply chain compromise via dependencies or CI/CD tooling
• Data exfiltration and extortion threats

Typical triggers

• Incomplete MFA coverage (especially for privileged accounts)
• Poor patch management and vulnerability remediation
• Over-permissioned accounts and lack of least-privilege access
• Weak logging/monitoring and slow detection
• Lack of network segmentation
• Poor vendor risk management (hosting, payment processors, support tools)

Where the money goes in a cyber claim

• Incident response and forensics
• Legal advice and regulatory support
• Customer notification and credit monitoring
• PR/crisis comms
• Business interruption and extra expense
• Restoration and hardening work
• Third-party claims from customers/partners

Risk reduction controls

• MFA everywhere, especially admin and remote access
• Centralised logging with alerting (and someone accountable for responding)
• Regular backups with offline/immutable copies and restore testing
• Endpoint detection and response (EDR)
• Security awareness training focused on real attack paths (phishing, MFA fatigue, invoice fraud)
• A rehearsed incident response plan (tabletop exercises)

3) Contractual liability disputes: penalties, service credits, and indemnities

What it looks like

• Service credits for downtime
• Liquidated damages for missed milestones
• Broad indemnities (including IP, data protection, confidentiality)
• Uncapped liability for certain losses
• “Fitness for purpose” wording that’s hard to defend

Typical triggers

• Aggressive procurement terms from enterprise clients
• Sales pressure to “just sign it” to close the deal
• Contracts not aligned with your actual technical architecture and dependencies
• SLAs that don’t reflect maintenance windows, third-party outages, or realistic RTO/RPO

Risk reduction controls

• Contract review playbooks (what you can/can’t agree to)
• Standard limitation of liability language aligned with PI and cyber insurance
• SLA wording that accounts for third-party dependencies
• Clear definitions of “availability”, “incident”, “maintenance”, and “force majeure”
• A formal escalation process before a dispute becomes a claim

4) Intellectual Property (IP) claims: copyright, licensing, and code ownership disputes

What it looks like

• A former contractor claims they own part of the codebase
• A client claims the deliverable is “work made for hire” and demands ownership
• Use of open-source components breaches licence terms
• A competitor alleges your product infringes their IP
• A developer reuses code from a previous employer

Typical triggers

• Missing IP assignment clauses in contractor agreements
• Poor tracking of open-source usage and licences
• Lack of code provenance controls
• Weak onboarding/offboarding processes for developers

Risk reduction controls

• Written IP assignment agreements for employees and contractors
• Open-source policy with automated scanning (SCA tools)
• Code review standards that include licence/provenance checks
• Clear contract language on ownership vs licensing of deliverables
• A clean process for accepting third-party code contributions

5) Employment practices claims: unfair dismissal, discrimination, and whistleblowing

What it looks like

• Unfair dismissal
• Discrimination (age, sex, race, disability)
• Harassment and hostile work environment
• Failure to make reasonable adjustments
• Whistleblowing detriment claims
• Constructive dismissal due to workload or management style

Typical triggers

• Poor documentation of performance management
• Inconsistent treatment between employees
• Lack of training for line managers
• Remote/hybrid management challenges
• Rapid scaling without HR structure

Risk reduction controls

• Documented HR processes and manager training
• Consistent probation and performance review frameworks
• Clear grievance and whistleblowing procedures
• Role clarity and workload management
• Employment Practices Liability cover (often part of management liability)

6) Directors & Officers (D&O) claims: investor disputes and governance issues

What it looks like

• Shareholder or investor allegations of misrepresentation
• Employment-related claims against individuals
• Regulatory investigations
• Insolvency-related actions (wrongful trading allegations)
• Disputes following a failed funding round or acquisition

Typical triggers

• Over-optimistic forecasts in fundraising decks
• Weak board minutes and decision records
• Poor handling of conflicts of interest
• Inadequate disclosure of risks to investors

Risk reduction controls

• Strong governance practices and documented decisions
• Clear investor communications and careful wording in forecasts
• D&O insurance structured to match funding stage and risk profile
• Legal review of key disclosures and fundraising materials

7) Data protection & GDPR claims: regulatory action and third-party liability

What it looks like

• ICO investigations and enforcement
• Data subject complaints
• Client claims for breach of contract and confidentiality
• Class-action style claims (more common in large breaches)

Typical triggers

• Lack of clear data processing agreements (DPAs)
• Unclear roles (controller vs processor) in contracts
• Poor retention and deletion practices
• Excessive data access internally
• Cross-border data transfer issues

Risk reduction controls

• DPAs aligned with your actual processing activities
• Data mapping and minimisation
• Access controls and audit trails
• Retention schedules and deletion automation
• Regular DPIAs for high-risk processing

8) Technology errors causing business interruption for clients

What it looks like

• Payment processing outage causing lost sales
• Booking/ordering systems failing during peak periods
• Logistics or scheduling software causing missed deliveries
• Security patch causing downtime without a rollback plan

Typical triggers

• Single points of failure in architecture
• Lack of rollback and release controls
• Poor incident communication and status updates
• No clear RTO/RPO commitments

Risk reduction controls

• Resilience engineering: redundancy, failover, tested DR
• Change management with staged rollouts
• Clear incident comms templates and client updates
• Post-incident reviews with documented improvements

9) Crime and fraud claims: invoice diversion, insider theft, and social engineering

What it looks like

• Fake supplier invoices
• Payment diversion scams
• Payroll fraud
• Insider theft of funds or assets
• Misuse of company cards

Typical triggers

• Single-person payment approval
• Weak vendor onboarding controls
• No call-back verification for bank detail changes
• Lack of separation of duties

Risk reduction controls

• Dual approval for payments
• Verified call-back procedures for bank changes
• Spending controls and audit trails
• Background checks for finance roles where appropriate
• Crime insurance / social engineering extensions (where available)

10) Property and business interruption claims: “We didn’t think this applied to us”

What it looks like

• Office fire or flood
• Theft of laptops and equipment
• Damage to on-prem servers (if any)
• Business interruption from physical events (depending on cover)

Typical triggers

• Underinsurance of equipment
• Lack of asset registers
• Poor security in shared offices
• No continuity plan for workspace loss

Risk reduction controls

• Asset registers and regular valuation updates
• Physical security and device encryption
• Business continuity plan (remote work fallback)
• Review of BI wording (especially if you rely on a physical location)

What Claims Directors Can Do: A Practical “Reduce Claims” Checklist

Contract & delivery controls (PI + contractual disputes)

• Standardised SoW templates with acceptance criteria
• Written change control
• Documented UAT sign-off
• Contract review guardrails (liability caps, indemnities, SLAs)

Security controls (cyber + GDPR)

• MFA everywhere, least privilege, and strong logging
• Tested backups and incident response plan
• Vendor risk management and dependency scanning
• Data mapping, DPAs, and retention controls

Governance & people controls (D&O + employment)

• Documented decisions and board minutes
• Manager training and consistent HR processes
• Clear whistleblowing and grievance routes

Insurance: what cover typically responds?

• Professional Indemnity Insurance (errors, omissions, negligence, failure to perform professional services)
• Cyber Insurance (incident response, data breach, ransomware, BI, third-party liability)
• Management Liability / D&O (director claims, governance, employment practices)
• Employers’ Liability (legal requirement in most UK cases)
• Public Liability (less common for pure software, but still relevant)
• Office/contents cover (equipment and property)

Final thoughts