Legal scrutiny is growing around the use of artificial intelligence, with implications for directors’ and officers’ cover, according to EBM.

The national broker says companies’ rush to be seen as tech leaders “has led to the rise in ‘AI washing’ – the practice of businesses overstating or misrepresenting their AI capabilities or prospects. AI washing can be intentional … or it can occur inadvertently (when a business adopts AI terminology and buzzwords without fully understanding the underlying technology). 

“Akin to false advertising and greenwashing, AI washing not only has the potential to harm the business’ reputation and bottom line, it can also put directors and officers in the firing line.”

AI washing can involve making claims about using the tech but being unable to substantiate them; overemphasising AI features in business operations; and misrepresenting or exaggerating the capabilities of AI systems.

“Growing legal scrutiny surrounding the use of AI – including allegations of AI washing – is presenting businesses and their directors and officers with new areas of liability,” EBM says in a market summary.

“Directors and officers can be held accountable by shareholders, the public and regulators for AI-related failures, including false claims.

“As more businesses adopt AI, greater focus on AI use and capability claims is inevitable. To reduce the risk of being held liable for damages caused by AI washing, directors and officers are encouraged to ensure they are aware of how AI is being implemented in their business, and the effects that may flow from that.”

The summary notes that while AI use has increased rapidly, traditional liability insurance policies do not refer to the technology.

“Known as ‘silent AI’, this is the risk insurers face in issuing policies that do not explicitly state whether AI risks are covered or not.

“Being silent on AI means claims could arise from incidents not initially considered when underwriting those policies. For example, AI-driven decision-making errors, data biases … could trigger claims that insurers did not foresee.”

The summary says rates in property and financial lines have continued to soften, and liability lines have begun to follow suit, bringing relief for clients who endured several years of significant premium rises and challenging conditions.

“Insurers continued to pursue growth within their portfolios, while new entrants to the market further boosted competition.

“As a result, there was greater capacity for clients with quality risks and better pricing for hard-to-place risks. Improved capacity also enabled stable pricing across most insurance classes.”