The information provided is not detailed or precise enough to answer your question and this is not to be treated as legal advice. However, in general, issues such as these arise when the client is not certain about the source of the code used in development of the software. Software developers often use open source and other third party code as components in developing the software. The source code is compiled and what you are providing to your client is only the executable program under the terms of a user license which gives them the right to use the software in their business.
As they do not have any access to the source code, they may not have the means to verify your source code origins and therefore they are not certain whether you have infringed any third party's intellectual property ownership in your code development. As such they do not wish to take on any liabilities that may arise from any potential infringement of a third party's IP rights in the development of your software.
While it is true that they are only the user and you are the developer and any primary responsibility for violation of IP rights would be that of the developer rather than the user, since you appear to be a small company, a potential litigant is likely to involve them in litigation due to their deeper pockets. Litigation is very expensive and only makes sense if a party with deep pockets is involved from whom recovery can be made. Therefore they need to eliminate or manage their risk of being subject to liability from the risk of litigation involving IP rights in your software and its components.
There are ways to manage such risks. Taking insurance to cover your specific risks (make sure to read the fine print in any insurance policy including its limitations and exclusions clauses) and adding the cost of its premium would be one approach as Ms. Pearson has suggested above. Making the terms of the indemnity very specific would be another. There may be other approaches but we would need more details to explore various options to manage the risk effectively. It would be best to seek legal advice and provide full details of your situation.