Professional liability insurance for IT companies – how to protect a software house against a costly bug in the code?

Having spent several years working at a SaaS company, I remember one thing clearly: even the most refined technological processes do not entirely eliminate the risk of error. Software development teams operate with extensive quality control procedures. Automated testing, code review, continuous integration processes and security audits are all designed to reduce the risk of defects in IT systems. Yet anyone who has worked in software development knows that sooner or later a situation arises where something behaves differently than intended.

The problem begins when a bug in the code stops being purely a technical issue and starts having real business consequences. If a system defect causes an application outage, data loss or disruption to a client’s processes, the question of the technology provider’s liability arises. In such situations, another question naturally follows: can the consequences of such an event be covered by insurance?

In practice, a well-designed professional liability insurance programme for IT companies can cover this type of risk. The technology sector has a specific form of insurance protection known as professional liability insurance for IT companies, often referred to as Technology Errors & Omissions (Tech E&O). It is built on the premise that damage may arise as a result of an error, negligence or improper performance of IT services.

What damage can a bug in the code cause?

The specific nature of technology business means that damage rarely takes a material form. Far more commonly, losses are financial in nature, resulting from disruption to the IT systems on which businesses depend.

In the IT sector, losses very often take the form of so-called pure financial losses – economic losses suffered by a client that are not connected with property damage or personal injury. In practice, they may arise from, for example, a system outage, a software error or incorrect data processing. From an insurance perspective, this is a significant distinction, because standard commercial liability insurance focuses primarily on personal injury and property damage, whereas technology projects most commonly involve the economic consequences of errors in IT systems.

An example of a pure financial loss

An IT company implemented an e-commerce order management system for a client. Due to a bug in the code, some orders were not being correctly recorded in the system. For several hours, the shop was accepting orders that were not being processed. The client had to refund payments, handle complaints and suffered losses resulting from the interruption to sales. This is a case of a pure financial loss, because no property damage or personal injury occurred, yet the business suffered a real economic loss as a result of the software defect.

The most commonly encountered situations include:

• unavailability of a system or application, leading to an interruption in the client’s operations,
• incorrect data processing, which may result in erroneous settlements or financial transactions,
• loss or corruption of data, which is of critical operational importance to many businesses,
• disruption to IT infrastructure, such as sales, logistics or production systems,
• financial losses resulting from the unavailability of digital services.

In such situations, a client may seek compensation from the technology provider, arguing that the damage arose from a defect in the software. Particularly in projects carried out for large organisations or under international contracts, the scale of potential claims can be significant.

Furthermore, depending on the nature of the project and the scope of liability, some data-related risks may require the programme to be supplemented with cyber insurance.

How does professional liability insurance for IT companies work?

Professional liability insurance in the technology sector is designed to protect a business against the financial consequences of claims arising from civil liability for IT services performed. Depending on the policy structure, cover may include, among other things:

• compensation payable to the client, where the IT company’s liability for the damage is established,
• legal defence costs, including lawyers’ fees and court proceedings costs,
• technical expert fees, which help establish the cause of the error and the scope of liability,
• settlement costs, where the parties decide to resolve the dispute amicably.

It is worth noting that many professional liability policies operate on a claims-made basis. This means that insurance cover applies to claims notified during the policy period, even if the event giving rise to the claim occurred earlier, provided it falls within the retroactive period specified in the policy.

Exclusions in IT liability policies – when can an insurer refuse to pay a claim?

As with most legal and financial instruments, the details are critical here. The mere fact of holding IT professional liability insurance does not mean that every situation involving a bug in the code will be covered.

The most commonly encountered exclusions relate in particular to:

• intentional acts or deliberate breaches of the law,
• guarantees of achieving a specific result that go beyond standard professional liability,
• contractual penalties, which are not generally covered unless expressly included in the policy,
• intellectual property infringement, unless the policy provides for such an extension.

In practice, this means that the effectiveness of insurance protection depends not only on holding a policy, but also on its scope and the nature of the business conducted by the technology company.

Technology contracts and insurance cover – how contract terms define IT risk

It is impossible to analyse liability for a bug in the code in isolation from the contracts concluded between IT companies and their clients. In practice, it is the technology contract that largely defines the scope of the software provider’s liability.

Such agreements frequently contain provisions relating to, among other things:

• limitation of liability clauses,
• system availability levels specified in SLA agreements,
• liability for data loss,
• the obligation for the technology service provider to hold insurance.

In many projects, particularly those carried out for large organisations or international clients, holding an appropriate professional liability policy is today a market standard.

Professional liability policy in the technology sector – market standard or optional extra?

The question of whether insurance will cover a bug in the code has no single universal answer. In many cases, a well-structured professional liability policy for the IT sector can cover both the compensation payable to the client and the costs associated with dispute proceedings. The ultimate scope of cover depends, however, on the terms of the insurance contract, the nature of the technology project and the content of the contract concluded with the client.

It can therefore be said that in a world where software is becoming the foundation of modern business operations, professional liability insurance is no longer merely a formal add-on. Increasingly, it forms part of contractual and operational risk management in technology business.