When it comes to running a software company, you have lots of responsibilities and worries; whether your business is protected shouldn’t be one of them. Unfortunately, lots of businesses do not have enough insurance coverage, and that goes for prepackaged software companies as well.
There are some pretty specific types of insurance that you should have if you are starting a software company or you are already in business, and knowing what these types of insurance are will allow you to protect your business if anything happens.
Developers of pre-packaged software produce standardized applications for general and niche markets. Prepackaged software ranges from inexpensive to very costly and serves a wide variety of purposes, including recreational (games, handicrafts, sports and exercise), educational (foreign languages, math, typing), business (accounting, sales), professional (computer-assisted design programs for architects, graphics editing programs) to general use (desktop publishing, tax preparation).
Although the computer industry moves very quickly, software can take years to develop. Successful software developers have many projects operating at one time, with the next level being developed even before the first one is launched. Let’s take a look at eight different types of prepackaged software insurance that are a good idea for software publishers to have.
Following are the primary types of prepackaged software insurance that software publishers should have or consider:
Another type of insurance is professional liability, commonly known as errors and omissions insurance (E&O). If you are a software developer, errors and omissions insurance is more important than almost anything else out there. That’s because the software that you create could cause major problems for someone using it if there are problems with your code or design. Problems can be caused even with prepackaged software that could result in harm to someone’s computer and this type of insurance will keep you protected.
Errors and omissions exposures are extensive but vary by the type of software and its intended use. If the software is essential to the business’s operation, the errors and omission exposure will be higher as there may be long-term consequences. The developer is always responsible for the fitness of a product for its advertised use and stated compatibility requirements. Failure of cheap recreational software to perform will not result in a serious loss, whereas failure of software designed to manage medical records could have serious consequences. Hazards are substantially greater if the developer does not keep detailed records of testing and research.
General liability is the most important type of prepackaged software insurance that any software development company can have, and that goes for tech companies like yours too. General liability protects you from lots of different things.
In the normal course of doing business, if something happens to cause harm or injury to another person, their business or their livelihood, then you could be held responsible. General liability was designed specifically to prevent that from happening. When you have general liability insurance, then you have some protection if you are sued for someone becoming injured at your place of business or suffering due to a software product that you have created or sold.
Premises liability exposure is minimal due to lack of public access. Off-premises exposures may arise from sales visits or promotional events at retail outlets. If the developer runs test markets on premises, the population base, and the product being tested should be reviewed. Areas accessible to the public must be well lighted with floor covering in good condition.
If children are used as focus groups for computer games, careful supervision procedures should be established, such as having the parents or guardians be responsible for their children during the testing. If there is any off-premises testing by the developer, there should be policies and training regarding acceptable off-premises behavior.
Property insurance is another important type of insurance for businesses. Property insurance makes sure that your physical property and all of your equipment is protected in case of things like fires, hurricanes, tornadoes and even theft and vandalism.
Business property exposures consist of an office operation, as well as any incidental storage and areas for service work on computers. Ignition sources include extensive electrical wiring to support computers and servers, heating and air conditioning systems, wear, and overheating of equipment. Fire, smoke, and water can cause significant damage to equipment. Fire protection should consist of chemical applications instead of water.
Although computer equipment can be included as part of the business personal property coverage, more complete protection is available under a computer or Electronic Data Processing (EDP) policy. A detailed emergency plan should be in place since downtime is not an option. Extra expense coverage is needed more than business income because the developer must keep operating if the product is to get to the market in time. The concentration of electronic equipment may be targeted by thieves. Appropriate security controls should be taken including physical barriers to prevent access to the premises after hours and an alarm system that reports directly to a central station or the police department.
Equipment breakdown exposures are typically moderate. Climate control is essential to proper computer function, and breakdown of the air-conditioning units may cause serious loss. There is also significant potential for direct or indirect loss due to computer breakdown or damage by power surges and power failure, affecting hardware, data, and media. Some of these may be addressed under either an EDP or equipment breakdown policy.
When these things happen to a company like yours, it can completely devastate you if you do not have the right prepackaged software insurance, because of all the expensive equipment that is required to do your work. You may have tens of thousands or even hundreds of thousands of dollars in computer equipment, inventory that you keep on site and intellectual property like code that is the entire foundation of your business. That’s why commercial property insurance is one of the most important types of insurance you can have.
Inland marine exposure includes accounts receivable if the developer offers credit, computers, and valuable papers and records for customers’ information. A computer or EDP policy is critical since it covers hardware, software, and media. These can be damaged by breakdown, power surges, power failure and computer viruses in addition to traditional property perils.
There should be frequent backup and off-site data storage. Information used to document the programming is not software and must be insured as valuable papers or its digital equivalent. The developer will have documentation for producing the software, patent and/or copyright information, and contractual relationships that are vital to the continuation of the company. All such paper, disks or other media should be duplicated and the duplicates kept off premises.
Workers compensation is a type of insurance that is required by law (in most states) any time you have employees. Workers comp provides medical treatment and replacement income for anyone who is injured on the job. You don’t really have a choice if you have any employees that earn a salary or are paid by the hour. There are some different options out there that you can choose from, but everyone has to have it. If you have an employee that is injured on the job, worker’s comp insurance may pay for their medical bills and reimburse them for the money that they would’ve earned while they are recovering due to this on-the-job injury.
Workers compensation exposure is limited to that of an office. As work is done on computers, potential injuries include eyestrain, neck strain, carpal tunnel syndrome, and similar cumulative trauma injuries that can be addressed through ergonomically designed workstations. Back sprains and strains can result from lifting and other material handling if there is any moving of computers or related equipment.
Another way to protect your company is with something called cyber liability insurance. Cyber liability is a type of prepackaged software insurance that is really great for tech companies to have because it protects you in case of a data breach. Data breaches happen all the time in today’s world, and hackers are everywhere and always trying to get at sensitive data.
Crime exposure is from employee dishonesty and computer fraud. Hazards increase in the absence of proper background checks. Billing and disbursements should be separated.
Products liability exposure comes from the unintended consequences of the interaction of the developer’s product and the customer’s equipment or other software, such as supplying a corrupted disk or download to customers. Coverage for this type of product liability is usually not a part of the general liability coverage and must be purchased using a specialty errors and omissions insurance product.
As a software company, you know the importance of good security, but no matter how good your security is you cannot protect data from everything. That’s why having this extra insurance that keeps you safe from liability (if there is a data breach) is more important for your company then it might be for others. Options vary, as will the cost, depending upon what sort of data you collect and how well you protect it already.
Employment practices liability is a type of insurance that protects from wrongful acts arising from the employment process. The most easy-to-understand example of business practices insurance in action is if someone brings a frivolous lawsuit against you for discrimination. You may not be actually guilty of discrimination, but if you have to go to court and defend yourself, you could end up spending tens of thousands of dollars or more. But EPLI makes sure that you are protected against these things as well as other damages that your employment practices could cause.
Commercial auto insurance is another important type of insurance for anyone that does business and uses a vehicle to do so. Not every software company or tech company will use vehicles during the normal course of their business; but many do. Business auto insurance is required whenever you use a vehicle to do your job. This doesn’t include your daily commute to work, but it might include vehicles that are driven for the purposes of software support in people’s homes or any other use of a commercial vehicle.
Auto liability is normally limited to hired and non-owned vehicles. If vehicles are provided to employees, there should be written procedures regarding personal use by employees and their family members. All drivers must have appropriate licenses and acceptable MVRs. Vehicles must be maintained and records kept in a central location.
Finally, you may want to consider what is known as commercial umbrella insurance. Umbrella coverage offers additional protection for liability that you may not even thought of yet. Umbrella coverage sort of fills in the gaps that are left by other types of insurance that you already have and increase the limits of your underlying liability insurance policies. As a software company, you may have lots of gaps that you are unaware of. Talk to your insurance broker and find out what your current insurance already covers. From there, you will be able to see whether you have gaps that need to be filled by additional umbrella coverage.
Insurers classify software businesses using several coding systems. You can wind up paying more for your insurance if your company is not properly classified – like an prepackaged software being coded as a SaaS firm. Below are the three most commonly used coding systems for prepackaged software insurance:
Here is the official OSHA SIC code description for prepackaged software companies:
Establishments primarily engaged in the design, development, and production of prepackaged computer software. Important products of this industry include operating, utility, and applications programs. Establishments of this industry may also provide services such as preparation of software documentation for the user-installation of software for the user; and training the user in the use of the software. Establishments primarily engaged in providing preparation of computer software documentation and installation of software on a contract or fee basis are classified in Industry 7379, and those engaged in training users in the use of computer software are classified in Industry 8243. Establishments primarily engaged in buying and selling prepackaged computer software are classified in Trade; those providing custom computer programming services are classified in Industry 7371; and those developing custom computer integrated systems are classified in Industry 7373.
- Applications software, computer prepackaged
- Computer software publishers, prepackaged
- Games, computer software: prepackaged
- Operating systems software, computer: prepackaged
- Software, computer: prepackaged
- Utility software, computer: prepackaged
We hope this article on prepackaged software insurance has been informative. There are a lot of different types of technology insurance available for software companies. You should understand what types of insurance are available, and also what insurance types are required by your specific business. Understanding what type of insurance your software company needs will go a long way towards helping you to protect yourself if things go wrong.
Minimum recommended coverage: Business Personal Property, Business Income with Extra Expense, Equipment Breakdown, Computer Fraud, Employee Dishonesty, Accounts Receivable, Computers, Valuable Papers and Records, General Liability, Employee Benefits Liability, Errors and Omissions Liability, Professional Liability, Umbrella Liability, Hired and Non-owned Auto Liability and Workers Compensation.
Other coverages to consider: Building, Earthquake, Flood, Real Property Legal Liability, Forgery, Cyber liability, Employment-related Practices Liability, Directors and Officers Liability, Business Auto Liability and Physical Damage and Stop Gap Liability.
