Software Developers Insurance
Software developers’ insurance has become vital for both freelance software developers and companies owing to the very fast growth of specific threats like cyber thefts and claims of professional liability.
All businesses are subject to risks, some of which are shared by all of us, and some of which are specific to the nature of the business.
Companies and individuals who are engaged in software development aren’t immune to general business risks.
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However, they carry some need for additional software developers’ insurance due to the particular nature of this business.
Where does the need for software development come from?
There are two main roads of business that can draw a person or company into product development.
1. In-house software
On the one hand, there is the need to provide personalized and specialized programs for companies of all sizes and in every industry.
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In many cases in the past, companies built up their own in-house development teams, with employees serving every role from designer through developer, tester, quality assurance and down to user training and support.
While this model worked well for the first fifty years, especially for larger companies, the constant evolution of new technologies has made it difficult for individual companies to keep the right skill-set on-board.
This means they are often unable to incorporate all the new techniques into the platform of services that the company uses to manage its business.
That led to a frequent situation where “lean-and-mean” startup companies that had built themselves on newer and more efficient technology were able to sneak up from behind.
In some cases, they managed to completely knock the older and better-established opposition right out of the market.
Probably the best example of that is Nokia, which fell from being the way-out-front leader in mobile devices to a very poor third place.
MySpace and Facebook are another example – very few people are aware that early on in the game, the owner of Facebook offered to sell his product to MySpace, then the leading social media company, for less than $100 million.
Today, Facebook is worth almost one trillion dollars!
In today’s ultra-competitive world, businesses don’t have any choice other than to keep up with developments in the digital world.
Technology is now the core foundation of every business and is controlling marketing activities and driving innovation. Businesses are looking all over for software programmers who can bring these new technologies to bear to keep their operations ahead of their competition.
2. Software product developers
In the last 20 years, the number of individual computers being operated in the world has gone up five-fold, from around 1 billion to over five billion.
Every one of these devices needs tens, or even hundreds, of software products.
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Of course, the field is dominated by big players.
Still, history has shown that smart and agile startups can find niches and quickly establish themselves as significant players in the software world.
The growth of so many new platforms for mobile and commercial computers, along with the required software skills like Java, Python, Game, Website developer and GO for programmers, and Full Stack, support for backend and frontend server in fields like Oracle, DevOps has produced an enormous potential market for specialists offering unique services to the business and consumer markets.
Right now, there is more than half a million software services companies operating in the US.
We will try to tell you what a software development company does and why this creates a need to take out insurance.
What is a software developer?
Software development companies design, develop and maintain applications for businesses or consumers.
The process requires conceiving, specifying, designing, programming, documenting, testing, and supporting applications and other software components.
The basic steps are:
- Identifying a need – what makes it important, different, or necessary? What features will create demand?
- Design the product
- Develop the software
- Test it
- Get it through quality assurance
One other step would be for companies developing products for the wider market, which would be marketing and advertising.
What are the risks that all businesses share that require insurance for all software developers?
Running any business carries risks like public liability, professional liability, property damage, theft, office fires, workers’ compensation, and other things that go with a commercial operation.
As well, for a software developer, there are some special considerations requiring errors and omissions insurance for software developers arising from issues like lawsuits over cyber theft, breach of contract, copyright, intellectual property infringement, employee grievances and more.
Having the proper professional liability insurance for software developers gives you ability to focus on running your business.
Freelance software developers should be paying particular attention to the three areas of liability (General, Product and Professional Indemnity), because they are all unlimited, and judgements can easily exceed your personal resources.
Over the next few paragraphs, we will outline the main issues that can constitute liability insurance issues for software developers and how the risks need to be catered for by having the right insurance.
Specific categories of software developers insurance needs
Professional Indemnity Insurance
Almost all businesses of every type take out Professional Liability / Errors and Omissions insurance.
However, whether you are creating a computer application that will change the world, or you are a programmer working on contract for a major corporation, there are risks involved.
A claim could arise that involves your day-to-day business.
Whether it arose intentionally or not, some things can happen that cause the client, or buyer of the software application, to sue you.
An example could be creating vulnerability to a cyber attack that ends up with the customer’s database locked up in a ransom attack.
Criminals demand hundreds of thousands of dollars to allow restored access to the customer’s database.
Other examples involve straight-out theft of financial data that can end up draining people’s bank accounts.
In general, software developer product liability insurance’s conditions are focused on physical products, and the intangible elements of software are only properly covered by software developer professional indemnity insurance.
What cover does Professional Indemnity Insurance for Software Developers provide?
In addition to Professional Liability / Errors & Omissions insurance, professional indemnity insurance will cover some fundamental extra things, because even the most careful designer or programmer can make errors.
You may end up with unsatisfied clients whatever steps you have taken to fix the problem.
You need to be covered for costs of the defense and court fees that can end up being in the thousands of dollars regardless of how the court case goes.
Even a win can leave you bearing your own lawyer’s charges, so having enough insurance coverage provides the best option.
Cybercrime is on the rise.
Because of the sensitive nature of information that they may be dealing with, software companies are often a chosen target for cybercriminals.
Stored sensitive information, like social security numbers, bank details, credit card numbers can be stolen, leaving you open to litigation.
According to the leading vendor of data security services Kaspersy, there are many types of cyber crime, and the list is growing all the time.
Right now, they list:
- Email and internet fraud
- Identity fraud where personal information is stolen and used
- Theft of financial or card payment data
- Theft and sale of corporate data
- Cyber extortion – demanding money to prevent a threatened attack
- Ransomware attacks which is a type of cyber extortion.
Software developers are in an extremely difficult position, both because they may be introducing gaps and vulnerabilities through which external attacks may be happening, and because they can also be accused of the other main elements of cyber theft, which are defined in the European Convention of Cybercrime:
- Illegally intercepting or stealing data
- Interfering with systems in a way that compromises a network
- Infringing copyright
- Illegal gambling
- Selling illegal items online
- Soliciting, producing or possessing child pornography
- Cryptojacking (where hackers mine cryptocurrency using resources they do not own)
- Cyber espionage where hackers access government or company data.
Cyber Liability Insurance
Cyber liability insurance protects against data breach or malicious software attack.
It covers all expenses including legal fees, and attributed fines, and can also account for customer notification and monitoring.
If sensitive data like Social Security numbers, credit card numbers, or other personal information is stolen or compromised, the software developer can be held liable.
Cyber liability insurance will cover all expenses arising from a client lawsuit and other related costs.
Arising from a data breach or cyberattack, this insurance will pay for:
- Cost of customer notification
- Fraud monitoring services
- Legal costs in the event of a lawsuit
What coverage does cyber liability insurance provide?
First-party cyber liability insurance covers data breaches inside your own business.
For example, credit card numbers could be stolen from a customer’s database you have stored in your computers.
First-party cyber liability insurance can cover all related claims and expenses.
Third-party cyber liability provides cover if a client believes you were supposed to add features that would act to prevent a data breach or cyberattack.
You could face a lawsuit if they claim it was due to negligence on your part.
For example, if you are developing network security software for a client, who subsequently suffers a breach, you could be sued.
Some insurance companies aiming at the software development market that needs third-party cyber coverage may offer to bundle cyber liability insurance and cyber theft insurance as tech E&O in with Errors & Omissions insurance because both protect against accusations of negligence.
Breach of copyright / Copyright Infringement
Many companies in the software development industry are facing severe competition and face-off in the same demographics offering similar services.
It’s essential to avoid even the slightest suggestion of copyright infringement or intellectual property infringement, and this can be very difficult.
Nothing stops your competitors from claiming that you have infringed even if you haven’t and that can certainly end up in an expensive lawsuit.
Employees could jeopardize your customers’ finances by engaging in unlawful access to sensitive information, fraudulent activities or theft.
The purpose of fidelity bonds is to safeguard your business against any such actions by an employee.
General commercial insurance
All businesses require the standard sorts of commercial insurance.
Why most businesses take out General Liability insurance
General liability insurance is a must-have type of insurance coverage for anyone involved in business operations.
Service providers like photographers, health coaches, tennis coaches, swimming instructors, or tradesmen like general contractors, solar panel installers, electricians, or pet carers like dog walkers, pet taxis, or vendors like Amazon FBA Sellers or e-Commerce sellers all require this insurance.
If someone is injured or their property is damaged as a result of your actions, or even if it’s only because it happens on your premises, your business can face a compensation claim as a result.
Accidents can occur at any time during conducting your business activities.
There is a legal duty that you will conduct your work in a manner that doesn’t endanger people in the immediate work area.
You must as well protect the property itself against damages resulting from your work.
When you are working in your own company’s property and may be visited by clients, business associates, or even friends, anyone in that location or any third party anywhere near where you are working could injure themselves or be hurt by something your domain.
A simple thing like a person tripping over a broken step into your office can give rise to a claim for damages.
As well, when you are working on-site for clients in offices and shops, there is a risk of damaging the walls, furniture, other electronic and computer hardware, or any other area of the property.
There is the same possibility that someone stumbling over the power cord to your computer can give rise to a claim for damages.
If the person injured, or the owner of the property damaged, claims that you were at fault, they may sue you for cost of replacement or repair, for any medical expenses, and for other things like “pain and distress”.
Remember that people are becoming increasingly litigious and even the friendliest customer can turn into a furious opponent in court.
Do you need professional indemnity insurance?
Also known as Professional Liability Insurance or Errors & Omissions (E&O) insurance, you should be considering purchasing it since almost all software developers provide the following:
- A professional service
- Professional advice to clients
- Contractual services.
You will need professional E&O coverage because these services come with risks.
You could be held liable for:
- breach of contract
- providing incomplete work
- providing substandard work
- work errors or oversights
- missing deadlines
Suppose your customer claims that any of these resulted in financial losses or reputational damage for them.
In that case, they could sue to recover from you all damages.
In addition to claiming that the service you provided was not performed properly and professionally, you may be sued for additional charges.
For example, when you agree to provide a working model of the agreed software by a certain date, but you have not fulfilled this commitment, if the owner now has to postpone a subsidiary business’ opening to after the expected due date, you can be sued for all relevant costs, business losses plus “reputation damage”, which can run into the tens of thousands of dollars.
In case of losing the case, in addition to the high court costs, you are liable for both your defense and for the other party’s costs.
Workers Compensation Insurance
In most states, this type of insurance is legally required for any business where the company employs one or more workers.
It’s important to know that the term “employee” is not restricted to full-time workers, but includes part-timers, temporary, casual workers, and subcontractors.
Workers compensation insurance protects such employees from any injuries or illnesses that are a result of work.
The insurance covers the employee’s wages for the time while he is off work sick or injured and his medical expenses.
It can also protect the employer from lawsuits connected with an unsafe work environment as long as he follows OSHA requirements.
To be eligible to get any payment from workers comp insurance, the injury or illness must be directly related to work.
This is why, to protect yourself and your employees, you must have workers’ compensation insurance.
There are monopolies on workers comp insurance in some states, and not all companies are allowed to sell it.
Always talk to an insurance agent, broker, company representative or check on the internet to find out the regulations for the state where you are operating.
If you run a multi-state business, you must cover the workers in each state separately in accordance with that state’s rules.
Since computer programmers need specialized and costly equipment, it is very expensive to replace it in case of any damage, loss or theft.
In particular, if the equipment has to be moved around and sometimes stored in insecure and unsafe environments while you are operating outside of your own workplace in clients’ premises, it is essential to have your own insurance in force, because the third-party’s insurance does not cover you.
As well, your computers, printers, servers and other specialized equipment may be subject to malicious damage, deliberate fire, theft, and other such deliberate acts, or to acts of nature like lightning strikes, hurricanes, earthquakes and other highly damaging natural events.
Unless you can afford to immediately replace such expensive gear quickly out of your own pocket, you should have full-level equipment insurance so that you can immediately buy any equipment needed to keep the business running.
Commercial Vehicle Insurance
You may be using a private car to travel around visiting clients’ offices initially.
Still, you must beware of the possibility that your car insurance doesn’t cover the loss of contents and damage if the vehicle is used for business purposes.
In addition, most private vehicle insurance policies cap the value of vehicle contents to a far lower level than the replacement cost of even basic portable computers, so you would have to fund new equipment yourself in the event of a fire or theft.
The only way to ensure that your vehicle is insured for both its own value, and the valuable contents, is by a proper commercial vehicle insurance package.
Beware – most car insurance companies do not cover the theft and damage to private vehicles used for business purposes, so you definitely need to add on commercial coverage, or take out separate insurance.
Commercial Property Insurance
Commercial insurance covering real estate is a major, and perhaps even the most important, aspect of commercial insurance.
Basically, it pays for losses and damages incurred to business property, whether leased or owned.
As a business, you may have multiple pieces of equipment, furniture, etc., in your office.
The policy would cover computers, copiers, fax machines, air conditioners, and basic furniture like chairs, tables, reception couches, and so on.
Damage or theft of any of these essential things can cost you a substantial amount, which is where your policy steps in.
Such damage may have been caused by natural disasters like earthquakes or floods, or accidentally because of the actions of one of your employees.
You can choose to add extra features to commercial property insurance, such as:
Equipment breakdown insurance
This type of insurance covers your business against damage to specialized equipment.
For example, suppose a fire in your office has caused damage to the computers, printers, or any other items.
In that case, machinery insurance will cover the replacement costs.
Business interruption insurance
Natural disasters can happen anywhere and anytime and can cause severe damage to your business property.
As a result of such damage, your business property may need to be restored and rebuilt, as a consequence of which you may have to shut your doors temporarily.
Business interruption insurance is geared towards compensating you if this happens, so you can still stay viable in this competitive business marketplace.
How much insurance should a Software Developer take?
The answer depends firstly on which of the two main types of software development streams you are running in, except for the Commercial insurances we outlined which would depend on the size of your business, number of employees, state of your equipment, and many more specific aspects.
Software developers working for individual clients on individual projects should take Product Indemnity insurance cover adding up to several multiples of the total of all work contracts over the past seven years, plus a reasonable estimate of the next 12 months.
This is necessary because liability does not end simply at the completion of a project, but may extend well beyond that.
The actual periods are different in each state, so it’s advisable to consult with a good insurance agent or broker to get the right information.
Much the same formula is required for E&O insurance, where the covers for breach of contract etc.
will need to cover your level of business activity.
In general, small software development companies take cover in the region of $250,000 for a single incident and $500,000 total for a single year.
How much does software developer insurance cost?
The two standard Commercial policies almost all businesses take out are General Liability and Professional Liability.
Public Liability policies for most small businesses cover you for up to $1 million for a single incident, with the total limit for one year at $2 million.
To get general liability insurance for software developers cover of $1 million / $2 million, you should expect to pay around $70 – $90 per month.
Some companies offer rates as low as $60-$65 per month in a few states, so it’s worthwhile doing a thorough internet search.
Errors and omissions insurance cost for software developers with a level of $250,0000 / $500,000 should be around $90-$120 per month.
Many insurance companies offer a package called the Business Owner’s Policy.
Most business owner policies combine the two liability covers, plus commercial property insurance, for around $100 per month, but that depends on the value of the property and the insurance levels chosen.
For cyber insurance, small to medium-sized software development businesses can expect to pay a monthly premium of $150 or upwards depending on the level of risk coming from how much sensitive information your business handles.
This should get you the usual level of cover chosen by software developers for cyber liability insurance, which is $1 million for a single occurrence, and $2 million in a single year, with a deductible of $1,000.
The nature of your work as a software developer introduces some risks that ordinary businesses are not facing.
It’s essential from the beginning to have in place all the right and necessary insurance coverages, rather than being faced with the consequences which can ruin not just your business but your future.