What Happens When Software Causes a Financial Loss for a Client?

Software runs payroll, processes payments, manages inventory, calculates tax, triggers trades, and controls access to sensitive data. When it goes wrong, the impact can be immediate and expensive: missed deadlines, incorrect invoices, regulatory penalties, lost sales, and reputational damage.

If you build, sell, implement, or maintain software, a client’s financial loss can quickly turn into a dispute about responsibility. And if you’re the client, you’ll want to know what options you have to recover losses.

This guide explains what typically happens when software causes a financial loss, how liability is assessed, what evidence matters, and how insurance can help in the UK.

1) First things first: what counts as “financial loss”?

A financial loss is any measurable monetary impact. In software disputes, it often falls into two buckets:

• Direct losses: money paid out or lost as a direct result of the issue (e.g., overpayments, duplicated refunds, incorrect pricing).

• Consequential losses: knock-on impacts (e.g., lost profit due to downtime, contractual penalties, reputational harm leading to lost customers).

Common examples include:

• A bug miscalculates VAT, leading to underpayment and HMRC interest/penalties.

• A payroll system error underpays staff, causing emergency corrections and potential employment claims.

• An eCommerce checkout failure causes a weekend of lost sales.

• A cybersecurity incident exposes customer data, triggering notification costs and business interruption.

• A system migration corrupts data and delays operations for weeks.

The key point: the bigger the loss, the more likely the client will look for someone else to pay.

2) The typical timeline after a loss occurs

When a client believes software caused financial harm, events usually follow a predictable pattern.

Step 1: Incident response and damage control

The priority is operational: restore service, stop further losses, and secure data. This phase often includes:

• Rolling back releases

• Hotfixes and patches

• Restoring backups

• Forensic investigation (especially if security is involved)

• Temporary workarounds

Step 2: Root cause analysis (RCA)

Clients will ask: What happened, why, and could it have been prevented? A written RCA can be a turning point in a dispute.

A strong RCA typically covers:

• Timeline of events

• Systems affected

• Technical cause (bug, configuration, integration failure, human error)

• Controls that failed (testing gaps, monitoring gaps, change management)

• Corrective actions and prevention plan

Step 3: Commercial negotiation

Before lawyers get involved, many disputes start with:

• Service credits

• Partial refunds

• Free additional work

• Contract variations

• A settlement agreement

If the client’s loss is significant, negotiation may fail quickly.

Step 4: Formal claim or legal action

If the client believes you are responsible and you can’t agree a commercial resolution, they may:

• Send a letter of claim (pre-action protocol)

• Withhold payment n- Terminate the contract

• Start court proceedings

• Refer to arbitration/mediation if the contract requires it

At this stage, documentation and contract wording become critical.

3) Who is responsible? How liability is usually assessed

Responsibility depends on the facts and the contract. In software-related losses, disputes commonly focus on four questions.

1) Was there a breach of contract?

Most software projects are governed by a contract (or at least terms and conditions). The client may argue you breached the agreement by failing to deliver:

• The agreed scope/specification

• A working system

• Service levels (uptime, response times)

• Security obligations

• Data protection obligations

If the contract defines acceptance criteria, testing responsibilities, and change control, that can help clarify whether the software “failed” contractually.

2) Was there negligence?

Even if the contract is unclear, a client may argue negligence: that you failed to exercise reasonable skill and care.

Examples might include:

• Inadequate testing for a high-risk feature

• Poor change management (deploying without approvals)

• Weak security controls leading to a breach

• Misleading advice during implementation

3) Was the loss foreseeable?

In many disputes, the client’s biggest losses are consequential (lost profit, reputational harm). These are often harder to recover unless they were foreseeable and not excluded by contract.

4) Did the client contribute to the problem?

Clients sometimes share responsibility, for example:

• They provided incorrect requirements or data

• They refused recommended security measures

• They delayed approvals or testing

• They changed processes without informing you

Shared responsibility can reduce the amount payable, depending on the circumstances.

4) The contract clauses that usually decide the outcome

When software causes a financial loss, the contract often determines whether the client can recover anything beyond a refund.

Limitation of liability

Many software contracts cap liability (e.g., fees paid in the last 12 months). This can dramatically limit exposure.

Exclusion of consequential loss

It’s common to exclude:

• Loss of profit

• Loss of revenue

• Loss of business

• Loss of goodwill

• Indirect or consequential loss

If the client’s claim is mainly lost profit from downtime, an exclusion clause may be central.

Warranties and disclaimers

Contracts may specify what you warrant (e.g., “will perform materially in accordance with documentation”) and what you don’t.

Service levels and remedies

SaaS agreements often provide service credits as the sole remedy for downtime. That can reduce the chance of a large claim, but only if the clause is enforceable and properly drafted.

Indemnities

Indemnities can shift risk for specific issues, such as:

• IP infringement

• Data protection breaches

• Security incidents

Indemnities can create significant exposure if not carefully limited.

Acceptance testing and sign-off

If the client signed off acceptance, it may be harder for them to argue the software never met requirements (though not impossible).

5) What evidence matters in a software financial loss dispute

When money is on the line, both sides will look for evidence that supports their version of events.

Useful evidence includes:

• Contracts, statements of work, change requests

• Acceptance criteria and sign-off documents

• Support tickets and incident logs

• Release notes and deployment records

• Monitoring dashboards and uptime reports

• Emails and meeting notes (especially around risk warnings)

• Test plans, test results, QA documentation

• Security policies and audit logs

• Backups and data integrity reports

If you’re a software supplier, your ability to show a disciplined process (testing, approvals, documentation) can make a major difference.

6) Common scenarios and how they play out

Scenario A: A bug causes incorrect financial calculations

This is one of the most common causes of direct loss.

Typical dispute points:

• Was the calculation logic specified correctly?

• Was the bug introduced in a recent change?

• Did the client validate outputs during UAT?

• How quickly did you respond once notified?

Resolution often involves:

• Fixing the bug

• Correcting data

• Negotiating compensation for direct losses

Scenario B: Downtime causes lost sales

Lost sales are often consequential. Clients may claim:

• Lost revenue during outage

• Marketing spend wasted

• Customer churn

Suppliers often rely on:

• SLA remedies (service credits)

• Consequential loss exclusions

• Evidence of reasonable incident response

Scenario C: Implementation advice leads to a bad decision

Sometimes the software works, but the advice around configuration, integration, or process change causes loss.

This can look like a professional negligence allegation. It’s especially relevant for:

• Consultants

• Systems integrators

• Managed service providers

• Dev agencies providing “strategy” and “architecture” advice

Scenario D: Cyber incident and data breach

If a breach leads to financial loss, claims may include:

• Incident response costs

• Regulatory fines (where insurable)

• Customer notification and credit monitoring

• Business interruption

• Third-party claims

Liability may hinge on:

• Security obligations in the contract

• Whether reasonable security measures were in place

• Shared responsibility (e.g., client misconfiguration)

7) What can the client do to recover losses?

Clients typically have several options, depending on the contract and facts:

• Request remediation: fix, patch, restore, re-implement.

• Seek a refund or fee reduction: especially if the service is unusable.

• Claim damages: for direct losses (and sometimes consequential losses).

• Terminate the contract: if there’s a material breach.

• Escalate to ADR: mediation or arbitration.

• Pursue litigation: if the claim is large and negotiations fail.

Clients should also consider their own insurance position (for example, cyber cover or business interruption) to recover costs quickly while liability is being argued.

8) What can the software supplier do to protect themselves?

If you supply software, the best protection is a combination of process, documentation, and risk transfer.

Strengthen your delivery and support process

• Clear scope and change control

• Written requirements and acceptance criteria

• Robust testing (including regression testing)

• Monitoring and alerting

• Incident response plan and post-incident RCA

Improve contract clarity

• Define what “working” means

• Set realistic SLAs

• Cap liability appropriately

• Be careful with indemnities

• Avoid vague promises in marketing materials

Communicate risk early

If you warn a client about a risk (e.g., “this integration is unstable” or “this deadline is unrealistic”), put it in writing.

9) Where insurance fits: Professional Indemnity, Cyber, and more

When software causes a client financial loss, insurance can be the difference between a painful dispute and a business-threatening event.

Professional Indemnity (PI) Insurance

PI is designed to cover claims arising from professional services, including allegations of:

• Negligent advice

• Errors in design/specification

• Failure to meet professional standards

• Breach of professional duty

For software businesses, PI can be relevant for:

• Development agencies

• Consultants and architects

• SaaS providers (especially where advice/configuration is part of the service)

• Systems integrators

PI can help with:

• Legal defence costs

• Compensation/settlement (subject to policy terms)

Cyber Insurance

Cyber cover typically focuses on:

• Incident response and forensics

• Data breach costs

• Business interruption from cyber events

• Liability arising from security incidents

If the “software loss” is tied to a breach, ransomware, or data incident, cyber insurance becomes central.

Public Liability / Products Liability

These are less commonly triggered by pure financial loss, but may be relevant if software is tied to physical harm or property damage (for example, software controlling machinery).

Contractual liability considerations

Insurance policies may not cover every contractual promise. If you agree to broad indemnities or uncapped liability, you may be taking on obligations your insurance won’t match.

10) Practical steps to take if you’re facing a claim

Whether you’re the client or the supplier, speed and discipline matter.

If you’re the client

• Preserve evidence: screenshots, logs, invoices, timelines

• Quantify losses clearly (direct vs consequential)

• Review the contract: caps, exclusions, SLAs

• Notify your insurer early if you have relevant cover

• Consider mediation to resolve faster

If you’re the supplier

• Don’t admit liability prematurely

• Preserve logs and documentation

• Produce a clear RCA and remediation plan

• Review contract terms and limitation clauses

• Notify your PI/cyber insurer promptly (late notification can cause problems)

11) Final thoughts

When software causes a client financial loss, the outcome usually depends on three things:

• What actually happened (technical facts and evidence)

• What the contract says (liability caps, exclusions, remedies)

• How both sides respond (speed, communication, and willingness to resolve)

If you build or supply software, the best time to manage this risk is before anything goes wrong: tight contracts, strong delivery controls, and the right insurance.

If you’re a business relying on software, it’s worth reviewing supplier terms and your own insurance position now, not after an incident.

Need help reviewing your risk exposure as a software supplier or tech-enabled business? Insure24 can help you explore Professional Indemnity and Cyber Insurance options tailored to your operations and contractual obligations.