Home Insurance AI Insurance Is a Risk Officer’s Nightmare
Author: Paula L. Green | Photos: Shutterstock
Insurers are carving out a variety of new exclusions for AI risk from corporate liability coverage.
This article appears in the October issue of Global Finance Magazine.
C-suite executives have a new headache when it comes to AI-generated risks. Their insurers may be getting ready to exclude AI-related claims from the range of liability policies available to them.
As corporate risk managers drop into negotiations with their insurers for the upcoming January 1 renewals, they will find out just how widely—and deeply—the exclusions will be applied.
“The mechanism is real and dated,” said Michel Léonard, chief economist and data scientist at The Insurance Information Institute, pointing to the generative AI-exclusion endorsements for general liability introduced last January by the Insurance Services Office (ISO), a subsidiary of Verisk Analytics. “More than 60 property and casualty carrier groups have filed to adopt some form of AI exclusion. But even industry analysts say it’s too early to know real-world renewal impact.
“We won’t know until renewals start coming in.”
C-suite execs and board members may bear the brunt of the AI exclusions, which are hitting hardest in the management and professional liability lines. Directors and officers (D&O), errors and omissions (E&O), employment practices liability insurance (EPLI), and fiduciary liability are the areas where “broad absolute” exclusions are most common, Léonard said.
Commercial general liability coverage, meanwhile, is being narrowed via the ISO endorsements, he added, although cyber cover remains comparatively more stable, with many carriers still affirmatively covering AI-enabled threats like deepfake fraud.
The practical fallout is that a wide range of claims where an AI system plays a role in generating harm have crossed into a no-coverage zone: employees alleging AI-driven discrimination; intellectual property violations, such as AI using copyrighted material without a company’s knowledge; and property damage caused by autonomous or robotic systems.
The consequences can be even more severe under the “absolute AI exclusion” shift. For example, under a ban issued last year by Berkley Insurance Co., which removed all D&O coverage touching AI use, deployment, or development, a director is no longer covered if a shareholder alleges harm due to inadequate AI governance. The exclusion also applies to Berkley’s E&O and fiduciary liability coverage.
But with the rapid pace of the exclusions’ roll-out and limited publicity surrounding them, many managers and board members will be in for a surprise this renewal season, industry observers say.
“This change has happened relatively quickly, so the knowledge gap is quite large at this point,” said Erike Young, deputy executive director of the California Intergovernmental Risk Authority. “Most organizations that have deployed AI at scale, most likely did so through their technology/operations teams, not through a risk management process.”
The insurance market has not yet issued public guidance around AI risks, as it did around Covid-19 exclusions , said Young, who is also founder of the Risk Management Study Group, an online educational platform. Adding to the murkiness, AI exclusions are not always labeled as such; some are included in extensions to existing cyber exclusions. Or they are issued as new endorsem…