Artificial Intelligence Regulation and the Uptick in AI-Related Federal Securities Class Actions

Artificial Intelligence Regulation and the Uptick in AI-Related Federal Securities Class Actions
September 27, 2024 4 mins

Artificial Intelligence Regulation and the Uptick in AI-Related Federal Securities Class Actions

artificial-intelligence-regulation-and-the-uptick-in-ai-related-federal-securities-class-actions

Artificial intelligence (AI) technology is rapidly evolving along with the associated risks. The evolving AI regulatory landscape and the uptick in litigation arising out of AI disclosures underscore the importance of managing these risks with directors’ and officers’ (D&O) insurance.

Key Takeaways
  1. The European Union AI Act entered into force on August 1, 2024. Violations of the AI Act have the possibility to result in substantial monetary penalties.
  2. In the U.S., the frequency of AI-related federal securities class actions is increasing.
  3. Organizations using and implementing AI should regularly review D&O policies as part of a broader risk management strategy.

EU AI ACT

On May 21, 2024, the European Council unanimously approved the adoption of the European Union’s (EU) first-of-its-kind Artificial Intelligence Act (‘the Act’). The Act entered into force on August 1, 2024, with various requirements to be phased in over the following three years. Persons subject to the Act include those who develop, deploy, import, or distribute AI systems in the EU — even if such persons are located elsewhere. The Act classifies and regulates AI with a risk-based approach, outright banning “unacceptable” risky AI systems (e.g., those used for social scoring and emotional recognition) and imposing varying degrees of compliance obligations (e.g., validation and human oversight) with respect to other AI systems.

Perhaps most relevant to insureds, the penalties contemplated by the Act can be levied against companies and individuals. Setting aside the harsher penalties for violating the Act’s ban on unacceptably risky AI systems noted above, even seemingly more mundane violations of some of the Act’s compliance obligations can result in penalties of up to €15M or (if the offender is a business) up to 3 percent of its worldwide annual turnover for the preceding financial year, whichever is higher.

U. S. Federal Securities Class Actions

Cornerstone Research reported its 2024 mid-year assessment of U.S. securities class action filings, spotlighting that D&O litigation arising out of AI disclosures is increasing. Specifically, the report detailed that the six AI-related federal securities class actions filed in the first half of 2024 (6) are consistent with the annual AI class action filing levels of each of the preceding four full calendar years (between 6 and 8). As Cornerstone warned, “[w]hile AI-related filings are not new, the growing prominence of AI in the business models of many companies may lead to an increase of such filings in the future.” 

Considering the EU’s new AI regulatory regime, together with the uptick in AI-related securities class actions in the U.S., it is clear that AI-related exposures for D&Os and organizations exist, notwithstanding the opportunities presented by AI. Exposure is likely to grow as lawmakers try to respond to this increasingly prominent and rapidly evolving technology. For example, the State of Colorado recently enacted AI legislation, set to come into effect in 2026, with other U.S. states expected to follow suit.

D&O insurance is one tool that can help organizations and their D&Os mitigate these exposures. Companies using AI should regularly review their D&O policies and consider seeking AI-specific coverage enhancements alongside others tied to other notable exposures, such as cybersecurity.

Consult with your Aon broker for any questions regarding the implications of emerging AI exposures and your D&O insurance. If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

Learn more about evolving risks related to AI, the regulatory landscape in Europe and the U.S., and governance and oversight processes with respect to implementing generative AI in Aon’s upcoming webinar, Artificial Intelligence Adoption and Usage — Governance and Risk Management Best Practices, on October 15. 

 
Aon's Thought Leaders
  • Nick Reider
    Senior Vice President and Deputy D&O Product Leader, North America
  • Tom McGarity
    Senior Vice President, Financial Services Group

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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