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 25, 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, 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.

Terms of Use

The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

Aon's Better Being Podcast

Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.

Aon Insights Series UK

Expert Views on Today's Risk Capital and Human Capital Issues

Construction and Infrastructure

The construction industry is under pressure from interconnected risks and notable macroeconomic developments. Learn how your organization can benefit from construction insurance and risk management.

Cyber Labs

Stay in the loop on today's most pressing cyber security matters.

Cyber Resilience

Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.

Employee Wellbeing

Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.

Environmental, Social and Governance Insights

Explore Aon's latest environmental social and governance (ESG) insights.

Q4 2023 Global Insurance Market Insights

Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.

Regional Results

How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.

Human Capital Analytics

Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.

Insights for HR

Explore our hand-picked insights for human resources professionals.

Workforce

Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.

Mergers and Acquisitions

Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.

Navigating Volatility

How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?

Parametric Insurance

Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.

Pay Transparency and Equity

Our Pay Transparency and Equity collection gives you access to the latest insights from Aon's human capital team on topics ranging from pay equity to diversity, equity and inclusion. Contact us to learn how we can help your organization address these issues.

Property Risk Management

Forecasters are predicting an extremely active 2024 Atlantic hurricane season. Take measures to build resilience to mitigate risk for hurricane-prone properties.

Technology

Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.

Top 10 Global Risks

Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.

Trade

Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.

Weather

With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.

Workforce Resilience

Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.

More Like This

View All
View All
Subscribe CTA Banner