Generative AI Losses: A New Frontier for Insurance Policies

    Covington attorneys explore the risks of generative AI tools in business insurance policies and the emergence of policies tailored for AI claims.

    As businesses begin to adopt generative AI tools, risk management strategies must evolve to address the unique attributes and potential losses that these technologies bring. In this article, we delve into the emerging risks associated with AI tools, examples of potential losses, and the implications for insurance policies.

    Unique Risks Posed by AI Tools

    Generative AI tools exhibit several unique characteristics that may result in losses for businesses. Some hypothetical examples include:

    AI “Hallucination”

    AI tools can generate plausible-sounding yet factually incorrect or misleading information. For instance, AI might produce a description of a product with non-existent features or provide dangerous product instructions.

    Infringing AI Training Data

    AI models can be trained using unlicensed data from the internet or social media platforms. Copyright litigation has already emerged, with Getty Images suing Stability AI for allegedly using over 12 million of its images to train an AI model.

    Sabotage by AI-Displaced Employees

    Goldman Sachs economists warn that AI technology could replace 300 million jobs. Disgruntled employees facing job loss due to AI might sabotage the technology or the adopting business, causing a range of losses.

    Insurance Policy Implications

    Existing commercial insurance policies may cover losses arising from business use of generative AI, but potential gaps and ambiguities in policy language should be considered. Careful scrutiny of policy language and a company’s specific AI risk profile are essential to avoid coverage disputes.

    Cyber Policies

    Cyber policies often cover risks from first-party digital asset loss to third-party liability for data breaches. Businesses might expect these policies to cover AI-specific risks, but insurers could dispute claims due to exclusions or gaps in the policy wording.

    Property Policies

    Many property policies may “silently” cover damage from AI-related causes due to their “all risks” coverage. AI can blend tangible and intangible asset values and perils, potentially causing tangible harm to owned property.

    Property policies might also provide valuable business interruption coverage in cases where AI-related events disrupt company operations.

    Technology Errors and Omissions Policies

    These policies may cover copyright violations and AI-generated erroneous advice. For example, Philadelphia Insurance offers a media liability endorsement that covers a “media wrongful incident,” including copyright infringement and plagiarism.

    However, potential traps may exist. Policies may exclude copyright infringement claims “arising from software or computer hardware” or exclude “intentional” AI acts.

    Crime Policies

    Crime policies and employee dishonesty policies might respond to conduct involving AI-related sabotage or automated payment diversion by disgruntled employees. However, it may be more challenging and costly to prove criminal or dishonest human conduct involving AI.

    New Risks, Policies, and Exclusions

    As AI technology evolves, insurers may introduce new policies, such as Munich Re’s “aiSure” policy, which promises to compensate clients if an AI solution underperforms. Conversely, insurers concerned about unanticipated risks may introduce new exclusions, potentially leading to costly coverage disputes.

    As businesses increasingly deploy generative AI tools, insurance policy renewals will require closer attention to wording details, ensuring insurance programs adequately cover unique AI risks.

    A Call to Action for Businesses and Insurers

    As the adoption of generative AI tools accelerates, both businesses and insurers must adapt their strategies and policies to address the emerging risks and potential losses associated with this technology. Companies should carefully scrutinize policy language and collaborate with insurers to develop comprehensive coverage that aligns with their unique AI risk profiles.

    Insurers, in turn, must be prepared to innovate and offer policies tailored to the specific needs of businesses utilizing AI. By working together, businesses and insurers can successfully navigate the new frontier of generative AI losses and create a more resilient future.

    Educating Businesses on AI Risks and Coverage Options

    As generative AI tools continue to gain traction in the business world, it is crucial for businesses to be educated on the associated risks and potential losses. This education should encompass not only an understanding of AI technology but also its potential impact on insurance policies and coverage options. Companies should collaborate with insurance brokers and legal counsel to assess their AI risk profiles and develop tailored strategies to mitigate potential losses.

    Collaboration Between Businesses, Insurers, and Regulators

    To effectively address the challenges posed by generative AI losses, collaboration between businesses, insurers, and regulators is essential. This collaboration should involve:

    1. Sharing knowledge and insights on emerging AI risks and potential losses.
    2. Developing industry best practices and guidelines for managing AI risks.
    3. Creating standardized policy language and coverage options to address AI-related losses.
    4. Establishing regulatory frameworks and oversight to ensure fair and transparent coverage for AI-related losses.

    Innovative Insurance Products for AI-Related Losses

    As businesses increasingly adopt generative AI tools, insurers must be prepared to offer innovative insurance products that address the unique risks and potential losses associated with this technology.

    This may involve developing new policy endorsements or coverage options specifically tailored to AI risks, as well as refining existing policies to ensure comprehensive coverage for AI-related losses. Insurers should also consider offering supplemental coverage for specialized claims expenses, similar to coverage for security breach forensics commonly found in cyber policies.

    The Need for Continued Monitoring and Adaptation

    As generative AI technology evolves and businesses continue to integrate AI tools into their operations, both businesses and insurers must remain vigilant in monitoring emerging risks and potential losses.

    This will require ongoing collaboration and communication between all stakeholders, as well as a commitment to continually adapting and refining risk management strategies, insurance policies, and regulatory frameworks. By staying ahead of the curve, businesses and insurers can ensure they are well-prepared to manage the unique risks and challenges associated with generative AI losses.

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