The Hidden C-Suite Risk Of AI Failures
Summary
Insurers are increasingly adding broad “AI exclusions” to liability policies that can bar coverage for claims “based upon, attributable to, arising out of, or related to” any use of artificial intelligence. These exclusions — often drafted to cover third‑party AI as well as an insured’s own systems — risk leaving directors, officers and organisations exposed to litigation and regulatory claims tied to AI failures, cyber incidents, privacy breaches, bodily injury or economic loss. While some carriers now offer affirmative AI liability products, the dominant immediate risk is gaps in traditional D&O, E&O and cyber cover that boards and risk teams may not appreciate.
Key Points
- Insurers are inserting expansive AI exclusions into policies, sometimes excluding claims even where AI played a negligible role.
- Exclusions can apply to any AI — including third‑party systems used by the insured — heightening the risk that vendor failures will void coverage.
- Cyber and privacy claims are particularly vulnerable because many security controls and attack vectors now involve AI (e.g. AI used in detection or deepfake phishing).
- D&O and E&O policies may contain overlapping exclusions (professional services, technology product/service limits) that together can strip both defence and indemnity for AI‑related suits.
- Definitions of “artificial intelligence” vary and may be unclear, making it hard for policyholders to know which tools trigger exclusions.
- Affirmative AI liability products are emerging as a potential gap filler, but they are new and not yet widespread.
- Practical steps: identify AI exposures, review policies at renewal, seek removal or narrowing of AI exclusions, consider affirmative AI cover, and involve experienced brokers and external counsel.
Content Summary
AI is now embedded across many business processes; yet insurers, worried about new loss vectors, are drafting AI‑specific exclusions that may be extremely broad. An example exclusion forbids defence for any claim “based upon, attributable to, arising out of, or related to, in whole, or in part, any use of artificial intelligence,” listing programming errors, bodily injury, property damage, economic loss and data breaches as excluded events. Because the wording reaches claims where AI played only a partial or indirect role, carriers could deny coverage for lawsuits even when final decisions were made by humans.
The exclusions frequently extend to AI used by third parties (vendors, partners), so claims arising from a vendor’s AI failure — for example, a misdiagnosis from a healthcare partner’s diagnostic tool or an investment loss from a portfolio optimisation tool used by an external provider — might be excluded. Professional liability and E&O policies may also limit cover to services provided by natural persons or to failures of software developed by the insured, creating further gaps. In a worst‑case scenario, an organisation could face an initial AI failure lawsuit with no E&O cover and subsequent shareholder or regulator claims excluded from D&O cover as well.
Some insurers, recognising demand, now offer affirmative AI liability policies that expressly insure AI risks. But these products are nascent and may not fully align with every organisation’s exposures. The article recommends that policyholders map their AI risk profile, closely review definitions and exclusions at renewal, negotiate deletions or narrower wording, consider affirmative AI cover where relevant, and retain specialised brokers and coverage counsel early.
Context and Relevance
As AI use becomes ubiquitous across healthcare, finance, software development and basic office productivity, insurance gaps rapidly translate into board‑level exposure. Regulators and investors are already litigating alleged misstatements about AI use (“AI washing”), and cyber threats increasingly leverage AI tools. The trend of insurers inserting broad, sometimes ambiguous exclusions is an immediate industry development that intersects governance, risk and compliance. For executives, general counsel and risk teams, this is not a niche coverage debate — it directly affects financial resilience and fiduciary duties.
Why should I read this?
Put simply: if you’re on the board or run risk, your perceived insurance safety net might be full of holes. This piece flags how insurers are quietly carving out AI risk and what to do about it — so you can avoid nasty surprises, renegotiate at renewal, or buy specific cover before a claim lands. Read it now — it’s short, sharp and could save your organisation serious liability down the line.
Source
Source: https://corpgov.law.harvard.edu/2025/09/22/the-hidden-c-suite-risk-of-ai-failures/