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Top Claims Directors of Software Companies Face (and How to Reduce Them)
Software businesses don’t usually think of themselves as “high claims” organisations. There are no forklifts, no scaffolding, no public-facing shop floor. Yet software companies can be surprisingly claim-prone — and the claims that do happen are often expensive, complex, and reputation-sensitive.
For Claims Directors (or anyone responsible for claims oversight, risk, compliance, or insurance), the challenge is that software claims rarely fit into one neat box. A single incident can involve professional indemnity, cyber, management liability, employment practices, and even property or business interruption.
This guide breaks down the most common claims software companies face, why they happen, what they typically cost (in real-world terms), and what practical controls reduce both frequency and severity.
1) Professional Indemnity (PI) claims: “Your software caused us loss”
What it looks like
Professional Indemnity claims are one of the biggest pain points for software companies — especially those delivering bespoke development, SaaS platforms, integrations, or managed services.
Common allegations include:
- 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
PI disputes often become a battle of documentation:
- What was promised?
- What was delivered?
- What did the client sign off?
- What evidence exists of testing, acceptance, and change requests?
If those records are weak, the claim becomes harder to defend and more likely to settle.
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
Cyber claims can hit software companies in two ways:
- Your own systems are compromised (first-party loss)
- You suffer a breach that impacts client data (third-party liability)
Common cyber incidents include:
- 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
Even when ransoms aren’t paid, costs can include:
- 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
Software companies often sign contracts with:
- 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
Claims Directors often get involved when a commercial dispute turns into a formal demand — and by then, positions are entrenched.
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
IP claims can be devastating because they threaten the product itself.
Common scenarios:
- 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
Software companies grow fast, hire competitively, and often operate under pressure. That can lead to people risk — and people risk becomes claims.
Common allegations:
- 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
D&O claims can arise from:
- 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
For software companies with external funding, D&O becomes increasingly important as governance complexity grows.
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
GDPR-related claims can come from:
- ICO investigations and enforcement
- Data subject complaints
- Client claims for breach of contract and confidentiality
- Class-action style claims (more common in large breaches)
Even when fines are not the biggest cost, legal defence and remediation work can be significant.
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
Some of the most contentious claims happen when a client’s operations stop and they blame your platform.
Examples:
- 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
Software companies are targets for:
- 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
Even software companies can have property exposures:
- 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
If you want a simple, high-impact approach, focus on the controls that reduce the biggest, most expensive claim types:
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?
While every policy is different, software companies often rely on:
- 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)
The key is making sure your contracts and your insurance align. If your contract says you’ll cover unlimited losses, but your policy has a £1m limit and exclusions, you’ve got a gap — and gaps are where claims become business-threatening.
Final thoughts
Software companies face a unique claims landscape: fewer “physical” incidents, but higher-value disputes around performance, data, and trust. The best Claims Directors treat claims prevention as a joint effort between legal, security, engineering, HR, and commercial teams — because most claims start as a process failure long before they become a legal demand.
Common questions
Does this article replace insurance advice?
No. It is general guidance only. The right policy still depends on the business activity, contracts, locations, turnover, staff, assets, claims history and insurer wording.
What information should I prepare before asking for quotes?
Prepare turnover, wage roll, activities, locations, contract requirements, claims history, asset values, existing policy details and any deadlines for evidence of cover.
Where should I go next?
Use the main Software Company Insurance page if you are ready to compare quote-led cover options or talk through the risk with Insure24.