Dramatic changes in the artificial intelligence (AI) landscape over the past year could have a material impact on directors’ and officers’ (D&O) liability.

Consider the Landscape

The influx of investments and interest in AI is dominating headlines: the meteoric rise of generative AI with the potential to reshape how businesses operate; board and C-Suite scuffles at a leading AI company, followed by a lawsuit against that company and its CEO; the possibility of replacing lawyers (but, so far, merely generating sanctionable legal briefs citing fake cases); and other headlines abound.

The seemingly inescapable discussions of AI’s potential have been taking place just about everywhere – in the newsroom, the classroom, the board room, and beyond – as have discussions of the risks that AI presents to enterprises and their D&Os. Just as D&O insurance has been a vital risk management tool for risks arising out of countless other novel technologies and strategies, it can also be a crucial tool to help companies and their D&Os manage AI risk.

D&O Risks Related to Artificial Intelligence

AI-related risks have already materialized. On February 21, 2024, following an alleged 30% stock drop, a company and certain of its D&Os were sued in a federal securities class action alleging that these defendants committed securities fraud by making false and misleading statements with respect to the company’s AI capabilities. Although the merits of this lawsuit have yet to be tested, it is reasonable to expect that other companies making AI disclosures and their respective D&Os could also be potential targets for the plaintiffs’ bar.

Just as AI disclosures are a potential source of claims for private securities class actions, they are also a potential source of regulatory claims. In a recent speech at Yale Law School, U.S. Securities and Exchange Commission (SEC) Chair, Gary Gensler, warned that the SEC “will make war without quarter” against companies and their D&Os who raise money from the public without being “truthful about [the company’s] use of AI and associated risk.” Chairman Gensler labeled such untruthful disclosures as “AI washing” —no doubt a reference to the false and misleading “greenwashing” climate-related disclosures that the SEC recently has targeted. Shortly after Chairman Gensler’s admonition, on March 18, 2024, the SEC announced “AI washing” settlements with two investment advisors that agreed to pay a collective $400,000 in civil penalties arising out of their allegedly false and misleading statements concerning their use of AI.

Besides securities class action and regulatory claims, D&Os face the risk of shareholder derivative claims alleging malfeasance with respect to corporate implementation and use of AI.

Corporate misuse of AI has the potential to develop into a variety of unfavorable outcomes and liabilities arising out of employment-related discrimination, and liabilities tied to intellectual property infringement claims, privacy claims, and defamation or similar tort claims.

When such risks materialize, it is not difficult to imagine shareholders suing the company’s board of directors and senior management, who are charged with overseeing the company’s affairs. Notably, the specter of such potential liability for corporate officers with day-to-day management responsibilities is particularly acute in light of recent case law in Delaware confirming for the first time that officers (not just directors) may face non-exculpable liability for failing to carry out their oversight obligations in breach of their fiduciary duty of loyalty to the company.

D&O Coverage Enhancements

Like all insureds, companies implementing and using AI are encouraged to audit their D&O policies regularly to ensure that their coverage is appropriately tailored. Aon has developed an approach to enhance AI-related D&O coverage, including by augmenting definitions of key terms such as “Loss” and “Insured Person,” and enhancing typical exclusionary language to carve back coverage for AI-related exposures.

Insureds should be prepared to address their companies’ use of AI, reliance on AI, financial or other relevant prospects based on AI, corporate governance and oversight of AI, and vetting of disclosures related to AI in D&O underwriting meetings.

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.

1 Fact Set Earnings Insight Report

Contact

Read Aon’s AI fact sheet here. Discuss this article with Financial Services Group professionals Nicholas Reider and Morgan Bui.



Nicholas Reider
Senior Vice President, Deputy D&O Product Leader – West
Denver










Morgan Bui
Vice President
New York

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