What Happens When a Small Coding Error Sparks a Legal Firestorm?
You’ve just rolled out a crucial software update for a major client. It seemed flawless—until a week later, their system crashes, resulting in massive financial losses. Their team is panicking. And now, they’re taking legal action against your company.
If you develop software, this isn’t just a hypothetical nightmare. Even a minor coding error can trigger legal disputes, financial damages, and reputational harm. That’s why Errors & Omissions (E&O) insurance isn’t just an option—it’s a crucial safeguard for your business.
Why Software Companies Face Unique Risks
Unlike traditional industries, software businesses deal in intangible assets like code, algorithms, and digital infrastructure—yet the consequences of errors can be very real.
A single mistake can:
✅ Cause costly service disruptions, leading to client financial losses.
✅ Expose confidential data, opening the door to lawsuits.
✅ Breach contractual obligations, resulting in legal claims.
According to the Verizon Data Breach Investigations Report, vulnerabilities in software are a primary cause of cyber incidents. And in an era of rising digital threats, unprotected tech companies invite enormous risks.
What Is Errors & Omissions (E&O) Insurance?
E&O insurance, a type of professional liability coverage, protects software companies from claims related to negligence, mistakes, or failure to meet contractual obligations.
Here’s what an E&O policy typically covers:
🔷 Legal defense costs—Covers attorney fees and court expenses.
🔷 Settlements & judgments—Pays damages if your company is found responsible.
🔷 Financial losses from coding errors—Helps cover mistakes that negatively impact clients.
Without E&O insurance, your company may have to cover six- or even seven-figure legal fees out of pocket, a financial hit that has forced many tech startups and firms to close their doors.
The Real Cost of a Software Mistake
A mid-sized SaaS company built an automated payroll system for a corporate client. A small bug in the algorithm miscalculated employee salaries for three months. As a result, employees were underpaid, and the client faced regulatory penalties.
The client sued for contract breaches and damages, demanding an $850,000 settlement. Since the SaaS company lacked E&O insurance, they had to pay out-of-pocket—leading to financial strain and eventual shutdown.
➡ Lesson learned? Even minor coding errors can have major financial consequences. Protect your business before a mistake turns into a lawsuit.
Do Software Companies Really Need E&O Insurance?
If your company provides custom software development, SaaS solutions, IT consulting, or cybersecurity services, you are at risk. Even well-drafted contracts won’t shield you from legal battles.
E&O insurance is especially critical if you:
✔ Handle sensitive client data (financial, healthcare, legal sectors).
✔ Develop mission-critical software (banking systems, cloud security).
✔ Work under strict service agreements with penalty clauses in case of failure.
Does this sound like your business? Then securing E&O coverage is non-negotiable.
Start with a personalized risk assessment today.
What’s Covered (And What’s Not)?
Many software founders assume their general liability insurance covers professional mistakes—it doesn’t. Here’s a breakdown of what E&O covers:
| Coverage | What’s Included? | What’s Not Covered? |
|---|---|---|
| Legal Fees | Covers attorney costs if sued | Excludes criminal cases |
| Settlements & Judgments | Pays damages if found liable | Doesn’t cover intentional misconduct |
| Coding Errors | Protects against software bugs | Doesn’t cover deliberate fraud |
| Contractual Disputes | Covers claims of non-performance | Doesn’t include open-ended guarantees |
For full protection, many software companies combine E&O insurance with cyber liability insurance, which covers data breaches, ransomware attacks, and compliance penalties.
Next Steps: How to Protect Your Business
A single lawsuit can derail everything you’ve built. Don’t wait until it’s too late—take these proactive steps:
1️⃣ Assess your risk exposure—What’s the worst-case legal scenario for your company?
2️⃣ Review your contracts—Do your agreements clarify liability in case of errors?
3️⃣ Secure the right coverage—Book a strategy session today to discuss tailored E&O insurance solutions.
What Our Clients Say
Still on the fence? See why software companies trust Hamsher Insurance for their liability coverage. Explore real client experiences.
Final Thought
In the fast-evolving tech landscape, one software flaw can mean business catastrophe. But with Errors & Omissions insurance, you’re not just protecting your company—you’re ensuring it thrives.
🔹 Start safeguarding your business today. Request a custom E&O insurance quote.
Frequently Asked Questions
1. Is E&O insurance required by law for software companies?
No, but many clients require insurance before signing contracts.
2. How much does professional liability insurance cost?
Costs vary based on company size, revenue, and risk exposure. Get a tailored estimate.
3. Does E&O insurance cover data breaches?
No, but cyber liability insurance does—many software companies purchase both.
4. Can independent developers get E&O insurance?
Yes! Freelancers and consultants face the same legal risks as larger firms.
5. How do I get started?
Schedule a call with an insurance expert today.
Want more insights on protecting your business? Explore our blog for expert risk management tips.