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Why Professional Indemnity Insurance for Software Developers Matters 

Iva P.10 min readJun 2, 2025Industry Insights
Iva P.10 min read
Contents:
What is professional indemnity insurance?
Why do software developers need professional indemnity insurance?
What does professional indemnity insurance cover for developers?
Cost of professional indemnity insurance software developers carry
Choosing a professional indemnity policy 
Wrapping up

Software developers, like other IT professionals, are exposed to mistakes and project risks. Even when they deliver correctly, they may still find themselves facing legal claims—often from clients looking for someone to hold responsible when a project runs into problems. That's why the professional indemnity insurance software developers buy isn’t just a formality. It helps protect their personal and business assets if their work is challenged.

In this blog, we explain why professional indemnity insurance for software developers matters, the main risks it covers, and how to choose the right policy. 

What is professional indemnity insurance?

Professional indemnity insurance is a type of liability insurance that protects software developers when a client claims that their work caused a financial loss. It covers the cost of defending against claims of negligence, errors, or omissions in the services provided.

For a developer, this means that if a client sues over a mistake in your code, a missed requirement, or flawed technical advice, your professional indemnity insurance policy helps pay for legal expenses and any settlement or compensation. 

This kind of insurance coverage applies specifically to claims related to professional services, not to physical injury or property damage. If, in the course of your work, you cause your client or employer to suffer a physical injury or you damage their property, either mishap will be covered by general liability insurance. 

Some clients may require you to carry professional liability insurance before they start working with you. This is to ensure that in case your work makes them suffer financial losses, there's assurance that they'll be able to recoup their losses through the insurance payout. 

A professional indemnity policy provides coverage during the policy period, and in some cases, for past work as well. This type of business insurance helps protect both freelance developers and software development firms from legal and financial risks tied to their work.

Professional indemnity insurance for software developers is sometimes referred to as errors and omissions insurance (E&O insurance). It’s one of the core insurance policies technology professionals should consider having. 

Why do software developers need professional indemnity insurance?

There are multiple reasons why, but they can all be summed up in one sentence: software developers need professional indemnity insurance to protect themselves from the financial impacts of lawsuits related to their work. Below, we look at 11 situations where being insured for professional liabilities can save the day. 

1. Lawsuits over mistakes or omissions

Software development projects fail for many reasons: buggy code, unclear specs, unstable environments, and so on. That doesn’t stop clients from filing lawsuits when they think your work caused them financial harm. Professional indemnity insurance coverage helps you handle the legal costs of defending against claims tied to performance, delivery, or professional advice.

Real example:

In Brown Bag Software v. Symantec Corp., Brown Bag sued Symantec and an individual developer over alleged similarities between software products. The court eventually ruled against Brown Bag, but the individual developer was still named in the suit. This case, though old, is a saddening demonstration of how software developers can be pulled into complex legal action. 

2. Breach of contract

A client doesn’t always need to prove negligence to sue you as a software developer. You just need to have allegedly failed to mest the terms of a contract. Missed delivery dates, incomplete features, or misunderstood obligations can all trigger a breach claim. The size of your business doesn’t matter here. A solo developer is no less at risk than a team of fifty.

Real example:

In 2021, CNBC reported that Tesla was suing a developer, Alex Khatilov, for breach of contract after he uploaded internal scripts to Dropbox. Tesla claimed the scripts were trade secrets. Whether or not the act was intentional, the breach led to legal action.

3. Data handling or cybersecurity issues

If you build or maintain systems that process sensitive data, a breach can trigger legal and regulatory fallout. You may not run the infrastructure, but if your code is involved in the failure, the liability could land on you.

Professional indemnity insurance for software developers can protect against claims related to data breaches, including those triggered by insecure implementation or system misconfiguration.

Real example:

HealthEC, a U.S.-based software developer in the healthcare space, suffered a breach in 2023 that exposed the personal and medical data of over 4.5 million patients. The stolen data included social security numbers, financial records, and medical histories. There’s no public confirmation that an individual software developer was involved, but any developer responsible for storing or exposing that data could be held liable.

4. Intellectual property infringement claims

Copyright law doesn’t care whether infringement is deliberate. If a client believes your codebase includes unauthorized use of protected material, they can pursue a claim. This applies even if the disputed content came from a third-party library or inherited code.

Fortunately, professional indemnity insurance coverage helps reimburse legal costs tied to copyright infringement, trade secret disputes, and accidental violations of IP agreements.

Real example:

Tesla has filed multiple lawsuits against former employees, including Guangzhi Cao, for copying proprietary source code. These cases show how aggressively companies protect IP. If a suit like this is filed against you, even defending yourself can cost a lot in terms of legal fees and reputation.

5. Third-party integration issues

A large portion of modern software relies on third-party APIs, SDKs, and external platforms. If one of those services suffers downtime or modifies its API structure, it can take your client’s system down with it. And while you don’t control the third party, if your code integrated it, you’re the one the client calls.

Developers regularly report problems with tools like Stripe, AWS, and Google Maps causing outages or unexpected failures. When that happens, clients don’t blame the vendor—they blame the developer. If your contract includes uptime guarantees or support SLAs, you could be on the hook for damages.

This is exactly the kind of risk professional indemnity insurance for software developers is built to handle. It protects you from liability when external tools cause internal failures.

6. Failure to meet industry or regulatory standards

If you write code that’s used in healthcare, finance, or education, you’re expected to align with regulatory frameworks like HIPAA, GDPR, or FERPA. Clients may assume your product is compliant if your role includes implementing or integrating platforms that store, transmit, or manage sensitive data. If regulators investigate or penalize them, they may come after you.

Thankfully, professional indemnity insurance can help cover legal costs tied to failure to meet regulatory obligations.

Real example:

Blackbaud, a cloud software vendor, paid $49.5 million to settle claims from 49 U.S. states after a ransomware attack led to regulatory violations. The company was also fined $3 million by the SEC. A freelance developer involved in that incident, without proper indemnity coverage, may be exposed to demands for compensation if their work is linked to the failure.

7. Missed deadlines or scope creep disputes

Clients often change their minds mid-project. If you don’t get those changes documented, you can end up accused of under-delivery. If you push back on extra features, the client might argue you breached the contract or failed to complete the work. These disputes don’t need strong legal footing to result in a lawsuit.

This kind of client conflict is common across industries, especially in agile environments without rigid specifications. As a result of conflicts of this nature, developers regularly face legal action over misunderstood deliverables.

With a professional indemnity insurance policy, you can cover your defense costs when a project dispute escalates into formal legal action.

8. Loss of client data or code

A single script can wipe a production database. A permissions misconfiguration can lock a client out of critical systems. If backups fail or aren’t set up, recovery may be impossible. When that happens, clients expect reimbursement for the damage.

Professional indemnity coverage gives software developers a financial cushion if they're pulled into breach-related legal action.

Real example:

Sabre GLBL Inc., a travel software company, is facing a class-action lawsuit after failing to detect a data breach for over a year. Developers involved in data management, backup automation, or deployment pipelines are not immune from blame in these cases.

9. Defamation or libel tied to code output

If you write or maintain software that publishes, filters, or enables user-generated content, you can be drawn into disputes involving reputational harm. Clients may claim your moderation logic or publishing engine allowed defamatory content to go live. While rare, defamation claims may arise from incidents involving AI-generated content and automated recommendation engines.

These cases are difficult to defend and can be expensive, even if your code didn’t create the content but simply enabled it to be published. Professional indemnity insurance protects developers in cases where software functionality results in downstream legal risk.

10. Client misinterpretation of your deliverables

Even if you deliver exactly what was scoped, the client might say it wasn’t what they needed. If the contract lacks precision or was mostly verbal, they can sue, claiming the result didn’t meet their expectations or cost them business.

This is one of the most common triggers for legal disputes between small businesses and clients. In court, the burden of proof often falls on the party with the weaker documentation. Without coverage, you’re paying out of pocket to defend a project that was technically delivered.

The professional indemnity insurance software developers carry helps cover the legal and financial impact of claims stemming from vague or misinterpreted project scope.

11. Retrospective liability

Not all claims happen right after delivery. Sometimes clients discover (or claim to discover) issues months or years after a project ends. They take legal action during your current policy period, even if the work happened years ago. 

Real-world data breach cases often show this delay in discovery. Sabre’s incident went undetected for over a year, and notification was delayed another 15 months. HealthEC didn’t report its breach to authorities for nearly five months. Developers who worked on those systems might be contacted well after the project ends.

A professional indemnity policy that includes retroactive liability coverage ensures you're protected for past work, not just current engagements.

What does professional indemnity insurance cover for developers?

Here’s what’s usually covered by professional indemnity insurance:

  • Legal fees and defense costs: Covers the cost of hiring a lawyer and responding to a lawsuit, whether the claim has merit or not.

  • Compensation claims and settlements: If you’re found liable or settle out of court, the insurer can pay damages on your behalf.

  • Mistakes, errors, or omissions in your code: Coverage applies if your work leads to bugs, missed functionality, or faulty implementation that causes a client financial loss.

  • Claims tied to poor professional advice: If your recommendations or technical guidance backfire, and the client takes legal action, the policy may help.

  • Involvement in a data breach or cyberattack: If a client’s breach or cyberattack traces back to your code or configuration, your policy can help with legal and financial liability.

  • Some IP-related claims: Depending on the wording, the policy may include coverage for claims of copyright infringement related to reused code or open-source integration.

A professional indemnity insurance for software developers is not a catch-all liability insurance policy. It doesn’t cover bodily injury, employee injuries, medical expenses, or commercial property damage. Those fall under other policies like general liability or commercial property insurance.

When comparing software developer insurance or techinsurance options, look for what the policy covers, what triggers it, and if there are any exclusion clauses that could deprive you of the benefits that you're to enjoy under the policy. Insurance companies are quick to reject claims once they find that the subject matters of the claims aren't covered by the policies of the policy holders bringing the claims. 

Cost of professional indemnity insurance software developers carry

The cost of professional indemnity insurance depends on the type of work you do, who you do it for, and your exposure to risk. Here’s a brief overview of how much you may expect to pay, depending on your business model, based on data from The Allen Thomas Group and Money Geek:

  • Sole proprietors: Around $80/month or $960/year

  • Small businesses (1–10 employees): $1,200–$2,500/year

  • Mid-size teams (11–50 employees): $3,000–$7,000/year

  • Larger firms (50+ employees): $7,000/year and up

Several factors influence what you’ll pay, such as:

  • Business size and revenue: Business owners with more clients and more projects are generally exposed to more risk.

  • Scope of work: Projects involving data-heavy systems, or regulated industries tend to cost more.

  • Location: If you buy professional liability insurance in a region with higher litigation rates, you may pay higher premiums.

  • Claims history: If you’ve had past claims, expect to pay more.

  • Coverage levels: Higher limits and lower deductibles increase the insurance cost.

When you look for a policy to cover your business, pricing can vary significantly across insurance companies. Always get multiple quotes and check what’s actually included in the policy for your business, not just the headline rate.

A certificate of insurance is often required by clients, so factor that into your vendor or contracting workflows.

The cost of professional indemnity insurance might feel like a lot, but it’s minor compared to the legal and financial exposure of a serious claim. If you're unsure where to start, an experienced broker can help you determine the right policy based on your work and risk profile.

Choosing a professional indemnity policy 

You need insurance that matches how you work, the types of clients you serve, and the risks you're realistically exposed to. Here’s what to look for when comparing options:

  • Coverage limits that reflect your risk: Don’t underinsure. If you work with enterprise clients or in high-stakes sectors like finance or health, a $1M limit may not be enough.

  • Clear exclusions: Every policy has exclusion clauses. Read the fine print. Does it exclude cyber-related claims? What about subcontractor errors? Know what’s not covered before you sign. A good policy for your business should exclude things like bodily injury or property damage (that’s general liability), but still cover technical claims. Be wary of policies that carve out employee dishonesty or anything related to third-party software.

  • Defense costs and legal representation: Some policies deduct legal fees from your total coverage limit while others don’t. That difference matters if you face a significant financial claim.

  • The insurer’s experience with tech professionals: Generalist providers may treat this like home insurance. You want someone who understands the difference between a missed deadline and a data exposure claim.

  • Retroactive coverage: Make sure the policy includes prior acts coverage if you're switching insurers. You don’t want a gap when a claim shows up tied to past work.

Wrapping up

If you need insurance that protects your output and reputation, not your office walls, consider professional indemnity insurance a core policy, not an optional one. If you’re not sure what you need, speak with a broker who specializes in software development insurance. That expert advice is often free and worth it.

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