Are Mistakes in Your AI Work Covered by Insurance?

It is a simple truth that, since the widespread introduction of Artificial Intelligence tools in late 2022 and early 2023, businesses and individuals around the world have relied on these AI systems to assist with a wide range of activities. In fact, for many businesses and companies AI tools have allowed them to fundamentally change the way they operate; impacting software creation, customer journeys, support systems, and even operational decisions.

It is now possible for a company to build a customer service chatbot, deploy a completely new code database, or even pivot products entirely in a timeframe that would have been inconceivable 3 years ago. While the assistance of Artificial Intelligence tools can be invaluable, producing new, tangible benefits to an organization, it is also possible for serious errors and mistakes to occur.

A key question for businesses in the modern world is not whether the organization utilizes AI, as many companies will include artificial intelligence tools in their workflows. Rather, a better question is whether the product of AI assisted work is part of the professional service being offered, the technology system being provided by the company, the general employment environment, or a physical interaction with third parties.

These distinctions matter.

Different policies, and different coverages, will respond to different triggers, and not every mistake made by an Artificial Intelligence tool is going to be covered in every applicable insurance situation.

AI In Insurance: Defining the Product Not the Technology

The first place to start when identifying the risk to your business from mistakes associated with any AI tools or services you may be using is to define what the product of the Artificial Intelligence “work” actually is.

This is extremely broad, and will vary depending on the business in question. The product of AI work could be a finished software platform. It could be a customer facing chatbot. It could even be a professional deliverable that was created with an AI platform. Understanding what was sold, who used it, and what expectations were created will better assist a company, and its insurance providers in understanding what losses could follow in a failure scenario.

An accounting firm that creates an AI-powered tax assistant which, in turn, ends up providing incorrect advice to a customer is a very different risk proposition to an AI-assisted warehouse robot that ends up injuring a customer, vendor, or warehouse worker. Likewise, an Artificial Intelligence marketing tool that ends up disclosing sensitive client data creates a different set of exposures than an AI model that goes offline after an attack.

What was the claim about? Did it involve negligent professional work, an employee injury, a cyber incident, or cause an injury or loss to a member of the general public? These are imperative questions to ask when considering the product of AI work, and how your use of AI will fit into your insurance structure. Further to this, organizations should also treat AI governance as a core component of their insurance conversations.

In Hong Kong, the Office of the Privacy Commissioner of Personal Data (PCPD) released a memo regarding personal data protection frameworks in AI in order to assist organizations procure, implement, and use AI (including generative AI) while complying with the local Personal Data (Privacy) Ordinance. The memo highlights Artificial Intelligence strategy and governance, risk assessment, human oversight, model testing, data preparation, monitoring, and stakeholder communication. These are not simply compliance themes, the are also the records that can assist a business in explaining what went wrong, what controls existed to prevent the loss, and whether a claim falls within the intended scope of coverage for any insurance policy that is now dealing with Artificial Intelligence.

AI Insurance; Professional Indemnity for Errors, Outputs, and Advice

Professional Indemnity Insurance, also known as Professional Liability Insurance, Errors and Omissions Insurance, or simply Malpractice Insurance, is often the first place to start when reviewing your exposure in relation to an Artificial Intelligence tool. Especially when the product of that tool’s “work” is advice, design, code, consultancy, or some other form of professional deliverable.

The reason to start with your Professional Indemnity policy is that this is the type of coverage designed to protect professionals in advice-giving industries against their defense and liability costs in relation to negligence claims arising from their business operations. With many of the initial applications for AI tools coming in the form of customer facing “chatbots” this type of insurance, and the consequent considerations, can be highly relevant for any business choosing to incorporate artificial intelligence systems into their workflows.

For example, a consultant could recommend an AI system that causes a client to rely on inaccurate outputs. A developer could build an AI model that fails to perform as specified. A software firm could attempt to deliver an artificial intelligence integration that completely fails to process transactions. An accountancy firm could use AI to prepare a report which contains critical mistakes, that ultimately the firm failed to check or correct.

It is important to realize that Professional Liability Insurance is not “AI Insurance.” It is a liability policy for the output of your professional work. As with all other forms of insurance, the description of the activities or risks being covered must be accurate. Fully disclosing use of artificial intelligence tools when applying for, or renewing a Professional Indemnity Insurance policy will ensure clarity and the ability to quickly process a claim in a loss situation. Businesses should also pay close attention to any exclusions placed on a Professional Indemnity Insurance policy they may be considering in relation to AI activities, systems, or tools. Some Professional Indemnity products may contain exclusions in relation to intellectual property disputes, contractual penalties, warranties, cyber events, prior known circumstances, or services outside the declared business activity.

If the product of your AI “work” uses third-party training data, open-sourced code, scraped content, or automated decision making, then a business should ask whether the policy responds to allegations of negligence, misrepresentation, breach of professional duty, privacy-related professional errors or infringement-style claims. T

The answer depends on the wording, not on a general assumption that “AI is covered.”

Cyber Risks Insurance and Artificial Intelligence

It is hard to discuss any Artificial Intelligence and Insurance topic without also mentioning Cyber Risks Insurance. This type of insurance coverage becomes a central consideration when the AI work product depends on data, digital infrastructure, online availability, user accounts, cloud environments, APIs, model access, payment systems or connected platforms.

Cyber Insurance is designed to limit the impact of losses following cyber incidents and may include protection for e-business interruption, e-vandalism, e-threat losses, privacy notification expenses and crisis management expenses. Third-party cyber liability cover may address disclosure liability, reputational liability, content liability, conduit liability and impaired access liability.

For AI “work,” cyber exposures are broad

A model may be compromised through credential theft. A chatbot may expose customer records. A prompt-injection attack may cause an AI agent to retrieve confidential data. A malicious actor may corrupt training data. A platform may be unavailable after a ransomware event. A business may need forensic support, notification assistance, legal advice, customer communication, restoration expenses and business interruption support after a digital attack.

However, Cyber Risks Insurance should not be confused with Professional Indemnity Insurance.

A cyber policy may respond to a digital attack, breach or system compromise, but it may not cover loss caused by flawed software, poor professional services or an AI tool that simply gives the wrong answer. Cyber Insurance is designed for losses resulting from a cyber or digital attack and is not an IT Errors and Omissions policy; losses from flawed software or services provided by an IT or software company should be considered under Information Technology Professional Indemnity arrangements.

That distinction is critical for AI companies.

If an AI model is hacked and client data is leaked, cyber insurance cover may be relevant. If the model was never hacked but produced defective recommendations because it was badly designed, Professional Indemnity may be the better fit.

If both happen together, the claim may involve both policies, and coordination becomes essential.

AI Insurance Risks; Falling Through the Gaps

The most dangerous AI insurance gaps often appear between policies. A Cyber Risks policy may exclude professional errors. A Professional Indemnity policy may exclude cyber incidents. A contract may impose obligations that go beyond the policy. A product warranty may promise performance that no liability policy was designed to guarantee.

This is why businesses should test realistic claim scenarios before relying on cover. What happens if an AI model produces a biased recruitment recommendation? What happens if a client alleges the model infringed intellectual property rights? What happens if a chatbot gives incorrect medical, legal, financial or technical information? What happens if an AI agent sends confidential data to the wrong person? What happens if a supplier’s model outage causes your platform to fail? What happens if an employee is injured while installing AI hardware at a client site? These questions reveal whether the risk sits inside one policy, across several policies, or outside the current insurance program.

The review should also consider territorial scope, jurisdiction, retroactive dates, claims-made conditions, notification requirements, policy limits, deductibles, sub-limits, exclusions and contractual liability language. AI businesses often serve customers across borders, process data in multiple locations and rely on third-party infrastructure. The policy must match the actual operating model.

An effective AI insurance review starts with a plain-language map of the AI lifecycle. The business should understand where data comes from, how consent and privacy obligations are handled, who built the model, who owns or licenses the technology, how outputs are validated, where human review occurs, how users are warned about limitations, how incidents are reported, and how the product is monitored after deployment.

For Professional Indemnity Insurance, the business should ask whether AI development, implementation, consultancy, model customization, software delivery, data analytics and automated recommendations are included in the professional services description. It should also ask whether the policy addresses defense costs, negligence, errors and omissions, intellectual property allegations, privacy-related professional failures, subcontracted work and claims from overseas clients.

For Cyber Risks Insurance, the business should ask whether cover includes breach response, forensic investigation, privacy notification, cyber extortion, business interruption, system restoration, third-party liability and incidents involving cloud providers or outsourced technology vendors. It should also ask how the policy treats AI-specific attack methods, compromised credentials, data poisoning, prompt injection, unauthorized model access and accidental disclosure through AI tools.

Protecting Yourself with Insurance

AI insurance should be reviewed whenever the business changes how it earns revenue, handles data, serves customers or deploys technology.

A company that begins as an internal AI user may become an AI vendor. A chatbot may evolve into a decisioning engine. A software pilot may become a regulated professional service. A digital tool may add hardware. A local platform may start serving overseas clients. Each development can alter the insurance answer.

The most reliable method is to treat AI as a business activity, not a buzzword. Identify the work product, identify who relies on it, identify what could go wrong, then match the loss scenario to the appropriate policy. Professional Indemnity Insurance is the natural starting point for AI errors, negligent services and financial loss. Cyber Risks Insurance is essential for data, systems and cyber incidents. 

A business that understands these differences is better positioned to buy insurance intelligently, negotiate contracts safely, respond to incidents quickly and explain its risk profile clearly. AI may be new, but the core insurance discipline remains familiar: define the exposure, disclose it accurately, check the wording, and keep the cover aligned with the real work being done.

For more information about business insurance or AI insurance, Contact Us Today and Ask CCW.

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