Today’s businesses depend heavily on artificial intelligence (AI) to run important tasks such as handling customer problems, identifying financial risks, managing supply chains, and supporting healthcare decisions. While AI helps improve speed and accuracy, it also brings risks that older insurance policies do not cover. Artificial intelligence can make wrong choices, provide false information or fail due to software problems or biased data.
These issues can lead to expensive lawsuits, fines from regulators, and damage to the company’s reputation. To address these new challenges, AI liability insurance appears to be a necessary protection. The insurance helps companies manage financial and legal issues from AI failures.
Understand the rise of AI business risks
In recent years, AI has been used in the business. By the end of 2024, studies have shown that more than 70% of companies in areas such as finance, healthcare, manufacturing and retail have used AI tools. For example, McKinsey & Company reported that by the end of 2024, about 78% of organizations have adopted AI in at least one business function. The Boston Consulting Group also found that despite adoption, 74% of companies are working to expand value from AI.
The new risks brought by AI are different from older technologies. One major risk when AI gives false or misleading answers is AI hallucinations. For example, a language model might say something that sounds right but is actually wrong. This can lead to incorrect decisions based on error messages. Another risk is model drift. Over time, AI models may become more and more accurate as the data changes. If fraud detects AI drift, it could miss out on new fraud modes and lose or damage reputation.
There are other risks. Attackers can compromise AI training data, a problem called data poisoning, which can lead to AI behavioral errors. Privacy, prejudice and moral issues are becoming increasingly concerned. Like the EU’s AI Act, the new law aims to control AI usage and set strict rules).
Real-world cases show serious risks posed by AI systems. In September 2023, the Consumer Financial Protection Bureau (CFPB) gave guidance that lenders using AI must clearly explain why they reject credit, not just the general reason. This shows the need for fairness and openness in AI decision-making.
At the same time, AI errors in medical diagnosis have attracted people’s attention. The 2025 report of the healthcare safety organization ECRI warns that poor AI supervision can lead to false diagnosis and wrong treatments that harm patients. The report requires better rules to ensure that AI security in healthcare works.
These examples show that AI failures can lead to legal, financial, and reputational issues. Normal insurance generally does not cover these AI-related risks because it is not a particular challenge targeting AI. Experts say AI risks are growing rapidly and new ways to manage them are needed. To reduce these risks, more and more companies are obtaining AI liability insurance. This type of insurance helps protect companies from costs and legal issues caused by AI errors, biases or failures. Using AI liability insurance can help companies better handle AI risks and stay safe.
What is AI liability insurance and what does it cover?
AI liability insurance is a special type of coverage to fill gaps (E&O) and commercial general liability (CGL) left by traditional insurance such as errors and omissions. Conventional strategies often view AI problems as normal technical errors or cyber risks, but AI liability insurance focuses on the risks of design, use and management of AI systems.
This insurance usually covers:
- Failure of AI systems can lead to financial losses or damages.
- False or misleading AI output, sometimes called AI hallucinations.
- Unauthorized use of data or intellectual property in AI models.
- Fines and fines for violating new AI laws, such as the EU’s AI Act, can account for up to 6% of global revenue.
- Data breaches or security issues related to AI integration.
- Legal costs of litigation or investigation related to AI failure.
Why do AI liability insurance need and who provides it?
As more and more enterprises use AI, the risks are getting greater and greater. Artificial intelligence systems can take unpredictable actions and face new rules from governments. Therefore, managing AI risks requires new ideas, as AI is different from past technologies and regulations.
The government has enacted stricter laws on the security and equity of artificial intelligence. The EU’s AI bill is an example of setting clear rules and severe penalties for companies that do not follow. Similar laws are in the United States, Canada and elsewhere.
Insurance companies have begun offering special AI liability products to meet these needs. For example:
- Alliance Insurance covers the risks of generating AI, such as Deepfake fraud and security issues.
- RERM Insurance provides solutions such as Pontaai that covers bias, IP violations and regulatory issues.
- Munich RE’s AISURE™ protects businesses from AI model failures and performance degradation.
- Similarly, the AXA XL and Chaucer groups also have recognition of third-party AI risks and generation of AI exposures.
As AI becomes part of everyday business, AI liability insurance can help companies reduce financial risks, meet new laws and use AI responsibly.
The main functions and benefits of AI liability insurance
AI liability insurance provides some important benefits that can help businesses manage the unique risks posed by AI.
One of the main advantages is financial protection, covering the costs associated with AI failure. This includes paying third-party claims, such as lawsuits involving bias, discrimination or misinformation, and covering damages by the insured itself, such as business disruptions caused by failure of AI systems and management reputational damage.
Additionally, AI liability insurance often provides legal defense coverage to support defense claims or regulatory investigations, a key feature given the complexity of legal issues related to AI. Unlike general network or liability insurance, these policies are specially designed to cover AI-related risks such as hallucinations, model drifts, and software errors.
Companies can customize their policies to suit their specific AI usage and risk profiles. For example, healthcare AI developers may need to focus on patient safety coverage, while financial companies may prioritize fraud detection risks. Many AI liability insurance policies also offer extensive territorial restrictions, which are important for multinational operations that deploy AI in multiple countries.
In addition, insurers may require policyholders to follow best practices such as maintaining transparency, periodic audits and implementing risk management plans. This not only promotes safer AI deployment, but also helps build trust with regulators and customers. Together, these features provide businesses with a reliable way to handle AI risks confidently and protect their operations, finances and reputation.
Who should consider AI liability insurance? Use cases and industry examples
AI liability insurance is very important for companies that use AI technology. The risks of AI may vary depending on the industry and how AI is used. Companies should review their exposure to AI failures, legal issues and financial risks to decide whether this insurance is needed. Some industries face higher AI risks:
- Health care: AI helps diagnose and treat, but errors can harm patients and cause problems of responsibility.
- finance: AI is used for credit decision-making and fraud detection. Mistakes can lead to unfair decisions, losses or regulatory issues.
- Self-driving cars: Self-driving cars rely on AI, so accidents caused by AI errors require insurance protection.
- Marketing and content: The generated AI-created content may infringe copyright or spread false information, thus risking legal trouble.
- Cybersecurity: AI systems detect threats, but may fail due to attacks or errors, resulting in data breaches and liability.
Who needs AI liability insurance?
- AI developers and tech companies: They face risks such as bias, incorrect output and intellectual property disputes during AI creation.
- Enterprises using AI tools: If these tools fail or cause security issues, companies that use other people’s AI need protection.
- Risk Managers and Leaders: They should assess AI risks in their organizations and ensure proper coverage.
As artificial intelligence becomes more common, AI liability insurance is a crucial protection for companies that manage AI risks. If you need, I can help you learn about specific insurance policies from top providers.
Real examples and lessons learned
Real examples show how AI failures cause big problems for enterprises. Even if AI liability insurance is still new, there are some situations that prove why it is needed.
In 2023, a New York lawyer was in trouble with filing a legal case and was cited by a case caused by Chatgpt. The court said lawyers failed to check the accuracy of AI, resulting in legal penalties.
In 2024, Air Canada’s AI chatbot mistakenly promised discounts for bereavement, but the airline did not respect it. This caused a legal dispute, and the court ordered Air Canada to pay customers. This shows that AI information can lead to legal and financial risks.
The threat to businesses from the Deepfake scam is increasing. For example, a British energy company lost $243,000 after criminals used AI-generated sound deep strikes to imitate executives and deceive the company. This AI-driven fraud puts businesses at serious financial and security risks. Artificial intelligence liability insurance can help cover the losses of such scams and protect companies from AI-related threats.
From the above incidents, the course is obvious: AI failure can lead to litigation, fines and reputational damage. Ordinary insurance usually does not cover AI risks well, so companies need AI liability insurance. Companies using AI should regularly review their insurance and update to meet new rules and risks.
Bottom line
Artificial intelligence is becoming an important part of many businesses, but it also brings new risks that old insurance coverage does not cover well. Failures such as misdecision, misleading information and security threats can cause serious financial, legal and reputational damage. Real cases show that these risks are real and are growing.
AI liability insurance provides dedicated protection for these challenges. It can help businesses pay for costs from AI errors, legal claims and fraud while supporting compliance with new laws.
This coverage is especially needed by businesses in areas such as healthcare, finance and cybersecurity. As AI usage grows, regular review and updates of insurance are important to maintain protection. AI liability insurance is no longer optional; it is a necessary step to manage risks and keep your business safe in a world where AI plays a bigger role every day.
