As management and board members currently navigate the complex landscape of AI, the risks involved in this powerful technology are diverse. From potential data breaches, intellectual property disputes to errors in AI-driven decision-making, the challenges are unpredictable and material. Insurance plays a crucial role in mitigating such risks. Management and board members should therefore consider the following insurance categories and verify if they address AI-specific risks.
Errors and Omissions (E&O) Insurance
E&O Insurance is known as a professional liability insurance. Conceptually, this also apply to tech companies to provide coverage for claims arising from errors, omissions or failures in tech-products, -related services, including AI-systems. While E&O insurance traditionally protected professional service providers from liability due to human mistakes or negligence, the reliance on AI introduces some new vulnerabilities. The quality of AI's output is directly tied to the quality and completeness of data it is trained on. This creates new entry points of failure:
- Information Gaps: An incomplete or inaccurate database used by an AI tool employed by a professional services firm could lead to flawed results, exposing the firm to liability. For instance, an AI system used for financial analysis that lacks crucial data points could provide inaccurate advice which may result in financial losses for clients.
- Algorithm Errors: If an AI system produces incorrect or biased results that potentially harm customers, an enterprise could face lawsuits related to such incidents.
- Over-Inclusive Data: Using datasets that contain irrelevant or inaccurate information can also lead to wrong output. E.g., the use of drafts or preliminary data intended only for internal use, but accidentally included in the AI's training, might produce incorrect results used to advise clients.
By reason of the foregoing, it is pertinent to implement internal measures to mitigate these risks in the design stage. Even robust internal controls may not always be bullet-proof, so human oversight should be maintained to some degree as well.
Boards should therefore review and consider if their current E&O insurance policy is tailored to cover such specific risks (scope of coverage and any exclusions applicable to AI-related incidents).
Directors and Officers (D&O) Liability Insurance
D&O liability insurance protects board members and senior executives from personal liability for decisions made in their official functions (including oversight of AI-initiatives). Possible risks involved in such decisions are:
- AI Bias: AI systems trained on biased data may perpetuate and amplify biases, leading to reputational harm and potential legal repercussions for the company. This is particularly relevant in content creation, where AI-generated material might reflect undesirable biases.
- AI-Driven Decision Making: The use of AI in making business decisions, like reporting, corporate actions, or hiring practices, carries inherent risks. If an AI system makes a flawed recommendation resulting in financial losses or legal issues, the company's directors and officers could face liability.
- Misrepresentation of AI Capabilities: Companies making inaccurate or misleading claims or warranties about their AI systems' capabilities could face legal challenges. This underscores the need for transparent and accurate disclosure surrounding AI's role within their operations.
The risks potentially triggered by the abovementioned issues are manifold. E.g., as AI becomes more integrated into business operations, shareholders may file lawsuits alleging that directors failed to exercise sufficient oversight on AI-related risks. Also, regulatory bodies may investigate directors for failing to ensure compliance with AI-related laws and regulations. Finally, AI-related incidents can also damage a company's reputation leading to a decline in shareholder value.
D&O liability insurance can potentially help to protect directors and officers from claims of alleged mismanagement of AI risks. Boards should therefore verify if their D&O policy addresses AI-related risks and includes coverage for potential claims arising from AI mismanagement/oversight failures.
Intellectual Property (IP) and Commercial General Liability Insurance (CGL)
Intellectual property insurance protects companies against claims of IP-infringement or general commercial litigation liabilities as well as the costs associated with defending their own rights. Meanwhile, the increased prevalence of AI-generated content has prompted the development of standalone IP insurance policies. These policies provide more comprehensive coverage specifically addressing copyright and trademark violations. The benefits of such policies extend beyond the defense of claims, they can also assist policyholders in actively protecting and enforcing their intellectual property rights (e.g. challenging claims to AI-generated content ownership or conversely protecting proprietary AI against infringement by competitors).
Boards should therefore evaluate the need for IP- and commercial general liability insurance based on the extent of their company's reliance on AI-generated content and proprietary AI-technologies.
Cyberinsurance
Cyberinsurance is also a critical coverage type for mitigating AI-related risks. It protects against losses and liabilities resulting from cyberattacks, indicents, all of which can be closely linked to the use of AI-systems, e.g.:
- Data Breaches: AI systems usually process large volumes of data, making them attractive targets for cybercriminals. A data breach involving AI and the underlying critical mass of data could expose a company to significant risks. Cyber insurance may cover costs related to data breach notifications, legal fees, and regulatory fines.
- System Failures: AI-driven decision-making processes can be disrupted by cyberattacks which usually leads to operational downtime and lost revenues. Cyber insurance policies can sometimes provide coverage for such business interruptions.
- Ransomware Attacks: AI can be a target of ransomware attacks or inadvertently facilitate it if it is not properly secured. Cyber insurance policies sometimes cover ransom payments, as well as the costs associated for restoring data or negotiating with cyberattackers.
Boards should review whether their cyber insurance policy explicitly covers AI-related incidents and risks (especially newly emerging threats posed by AI).
Product Liability Insurance
Product Liability Insurance protects companies against claims for damages caused by defective products, including AI-driven products. Relevance to AI risks particularly emanates from AI product defects (e.g. an AI-powered bot which malfunctions or produces harmful outcomes) or compliance failures (e.g. an AI product which fails to meet regulatory standards/guidelines and therefore becomes subject to regulatory scrutiny and governmental interventions).
Boards should review if heir current product liability insurance policies include AI-driven products and consider the specific risks associated with AI (e.g. unanticipated behavior or decision-making errors).
Final remark
Insurance is a critical component of a comprehensive AI risk management strategy. Boards should make sure to secure appropriate coverage relating to AI risks with e.g. cyberinsurance, E&O insurance, D&O liability insurance, product liability insurance or IP or commercial general liability insurance. Boards can attempt to protect their organizations from legal repercussions of AI-related incidents. Regularly reviewing and updating insurance coverage in response to evolving AI technologies and their regulatory environment (e.g. new laws and statutes as e.g. the European AI Act and/or European AI Liability Directive) will help to ensure that the company remains resilient in the face of AI-related risks and threats.
