Artificial Intelligence, Real Risks: How Insurance Companies Can Provide Coverage in Response to AI Washing

The widespread and rapid adoption of generative AI technology to carry out daily business functions such as advertising, decision-making and product creation has been highly publicized. Many businesses highlight their use of such technology because it attracts consumers, investors and business partners. A current perception is that the utilization of generative AI enables more efficient and accurate functionality for almost any business. It comes as no surprise that in response, businesses are aggressively pitching and marketing their integration of artificial intelligence. The aggressive approach already gave rise to a number of risks, as described in our article, “Artificial Intelligence, Real Risks: Insurance Coverage that can Respond to AI-related Loss and Liability.” But what risks are associated with these businesses that are holding themselves out as more innovative than they actually might be? Such risks stemming from artificial intelligence, particularly the deceptive practice of AI washing, appear to be growing and, thus, understanding the possible methods of recovery under applicable insurance policies is important. 

AI Washing

The term “AI washing” recently become associated with companies outside of just the technology sector. The term has been coined to describe the marketing methods implemented by companies that exaggerate the amount or extent of AI-technology used within their manufacturing, automation or data processes and to provide a wide range of services. Sometimes the exaggeration reaches the point of being deceptive and possibly even a competitive tactic deployed to attract consumers, investors or others into believing that the company’s technologies are more capable, advanced or innovative than their competitors. AI marketing hype alone may provide a competitive advantage and attract investment.

AI washing can take a variety of forms. The sheer volume of publicity and attention surrounding AI utilization has driven companies to find new ways to set themselves apart. Most professionals receive multiple emails per day discussing AI in one form or another. The current White House administration has made it a priority to alter the AI policy in place from the prior administration.  Congress has held hearings on the technology. Businesses selling products want to offer ”AI-enabled” products and suggest they are better than products of the same kind that are not AI enabled.  Minor overstatements or exaggerations may be fine, but significant overstatements about functional capability may be problematic. 

One of the issues is that the rapid adoption of AI by many companies, including some which are not technology companies, is that they do not fully understand generative AI.  They understand less about the technology behind generative AI or how it is being deployed.  Some companies have different departments within the company handling the generative AI technology versus marketing and dealing with investors. Not all AI washing is necessarily intended to be deceptive, though in many instances it is alleged or even proven to be.  AI washing can be the result of an unintentional misrepresentation – meaning companies may inadvertently engage in AI washing due to their minimal understanding of what is considered or constitutes generative AI technology. In some cases, the representations about products and services may be exaggerations. But when the exaggerations induce customers or investors to act and turn out to be unfounded, claims and allegations may follow. 

Some businesses use vague terminology or buzzwords to describe their purportedly AI-driven products and services.  This practice can be equally problematic. For example, companies may state that their systems and software are “intelligent” and “smart.”  The purpose may be to have consumers believe that the systems being referenced in the advertisements are generative AI technology. The use of vague language can also mask the limitations of the technology’s actual capabilities.  Vague language might permit the public to assume a product is fully functional or fully powered by generative AI, rather than merely having an AI component or possibly facing regulatory or industry scrutiny as to functionality. 

Risks & Regulation

Regardless of the way in which businesses market their use of generative AI, the potentially overstated advertising of such technologies creates real risks. Once customers or investors engage, they may demand proof of this alleged technology, which may result in a substantial loss of profit, investments and credible notability. In addition to these losses, there has been a recent push for more regulatory structure to impose sanctions and legal authority for companies engaging in AI washing. 

Given the massive amount of marketing surrounding the huge rise in the utilization of generative AI, it is not surprising that regulators have taken steps to set boundaries. For example, the Federal Trade Commission (FTC) is actively working to protect consumers from misleading claims about AI systems. The FTC recently rolled out their “Operation AI Comply” which, aside from cracking down on the storing of personal information, also seeks to take action against companies engaging in deceptive practices while relying on AI. One case announced as a part of this new enforcement group is against Ascend Ecom. The FTC alleged that the company advertised its “cutting edge” AI system that would help consumers generate thousands in passive income a month by opening online storefronts for them. It further alleged that the company defrauded consumers of at least $25 million and received several negative reviews for its failure to possess the technology to complete the tasks as promised. Ascend Ecom’s regulatory woes are an example of the consequences from a company overstating its AI systems capabilities. The AI Comply team was able to have a federal court issue a halt on the scheme and place the business under the control of a receiver. 

Not all companies need to reach the level of Ascend Ecom’s behavior to incur potential liability. For example, currently out of the Central District Court of California, Skyworks Solutions, a semiconductor manufacturer, is facing a lawsuit brought by a plaintiff shareholder. It is alleged that the company projected favorable growth, specifically by their smartphone sector in the upgrade cycle, which is attributed by the company’s “well-positioned” ability to capitalize in the rise of AI technology. Unfortunately, the company reported negative results for its first quarter of the fiscal year, and these statements alone, absent material facts of the actual use of AI was sufficient for the claim. This case highlights when companies simply publicly project to benefit from the rise in AI technology ultimately attracting investors, they still may face financial and legal repercussions. Luckily here, coverage could likely be provided under a Directors & Officers Policy. 

Further, agencies like the Securities and Exchange Commission (SEC) have also charged investment advisors with making misleading statements about the extent to which they use artificial intelligence. Unlike Ascend Ecom, the two investment advising firms, “Delphia (USA) Inc. and Global Predictions Inc., [were charged] with making false and misleading statements about their purported use of artificial intelligence (AI).”  The charges brought by the SEC resulted in $400,000 civil penalties, holding this as an exemplar to deter companies from engaging in AI washing. 

In addition to the above-mentioned regulatory actions being taken in response to AI washing, there are several other risks associated with such acts. The legal actions being publicized or the negative reviews indicating fabricated marketing can lead to a mistrusted relationship with consumers and reputational damage. 

Historically, regulatory oversight often leads to claims by private parties. Claims can be brought by customers and competitors, or they can be brought by shareholders. The consequences of the alleged AI Washing may drive the types of damages that are alleged. For example, customers may allege that the product, software or otherwise, was defective, noncompliant or otherwise not the item marketed, causing damage. If a generative AI tool does not perform or function as represented, there may be failed processes leading to multiple levels of consumer liability. For example, a generative AI tool used for hiring that does not actually utilize generative AI as expected and, therefore, does not make the expected types of employment-related decisions could lead to employment-related claims. Similarly, if the AI washing affects the stock price of a company, shareholders may bring claims. These differing claims based on differing alleged harms typically lead to different damages.

Responsive Insurance Coverage

With different claims leading to different liabilities and damages, whether regulatory or private, the question becomes which insurance policies might respond to and defray the risks associated with AI washing? Many existing policies do not explicitly cover the use of AI technology, let alone AI washing, but also do not exclude or even mention AI, generative AI or AI washing. Analyzing coverage can become complex. Understanding the language within current policies is important. 

For software and services surrounding it, often Errors & Omission Liability (E&O) Policy. E&O Policies are helpful. They typically cover claims alleging wrongful acts, such as acts, omissions, misrepresentations and statements alleged to have breached a duty of care, in the course of performing or providing professional services. This type of insurance covers claims arising from a business’s negligence or failure to deliver services. For example, if a company claims to use an AI system that is fully capable and unbiased in rendering services requiring decision-making, yet the generative AI utilized manages to underperform resulting in a client loss, this policy may kick in.  Many claims are resolved by settlement, resolving issues of coverage surrounding purported fraud.  

The risks related to promoting emerging technologies, such as deployment of generative AI technology is substantial. In some cases, where the decision-making processes surrounding deployment, representations and other issues are called into questions, the claims can reach individuals within the company itself. Such claims may fall under a directors and officers’ liability (D&O) policy. D&O policies provide a critical safety net for directors and officers that face potential liability because of a business’ decision. D&O policies provide coverage for corporate executive assets regarding claims that relate to their breach of fiduciary duty and managerial decisions. In cases where, as mentioned above, the SEC issues orders against a company and its directors for their roles in approving the marketing or disclosures describing AI technology that is not being used, D&O coverage should provide coverage.  Often SEC and other regulatory investigation spur class actions and derivative lawsuits that may be covered by D&O policies as well. However, board oversight of AI related marketing may be a safeguard to mitigate risks that may result in a breach of fiduciary duties. 

Additional policies such as cyber liability, media liability and product liability Insurance may also help mitigate risks associated with AI washing. These policies address technology failures and claims arising from defective products or services. Depending on the facts alleged, the coverage under any one of these types of policies may likely be broad enough to encompass losses and claims that involve generative AI. They also may provide coverage for fines and penalties or other liability that might be excluded under a general liability or E&O policy.  

The foregoing is not an exhaustive discussion of the coverage available under the mentioned policies, or of the potentially responsive policies. There are numerous other policies that offer critical safeguards against the legal risks arising from generative AI and from alleged misrepresentations made by businesses.   

Conclusion

It is imperative to note that staying abreast of technical capabilities, innovation and, in particular, generative AI usage will help when marketing so that businesses do not find themselves in a situation facing potential liability. 

The ongoing pressure exerted by current market trends to integrate generative AI technology into businesses has provoked a rapid increase in marketing efforts to display its use. Accordingly, generative AI related claims are increasing and policyholders caught up in those claims are increasingly turning to their insurance coverage. Policyholders should be aware of what kinds of insurance policies exist that will help mitigate such risks and be ready to press for coverage. 

Sources:

1. Alexander & Healy “Artificial Intelligence, Real Risks: Insurance Coverage that can Respond to AI-related Loss and Liability” Westlaw Today (Feb. 28, 2025), Artificial Intelligence, Real Risks: Insurance Coverage that can Respond to AI-related Loss and Liability.

1. Federal Trade Commission, FTC Announces Crackdown on Deceptive AI Claims and Schemes, FTC Press Release (Sept. 25, 2024), available at https://www.ftc.gov/news-events/news/press-releases/2024/09/ftc-announces-crackdown-deceptive-ai-claims-schemes.

1. Gross, Grant, "Under Pressure to Show Progress, CIOs Must Beware Committing AI Washing Themselves," CIO (July 23, 2024), https://www.cio.com/article/3476097/under-pressure-to-show-progress-cios-must-beware-committing-ai-washing-themselves.html.

1. LaCroix, Kevin,  Two Companies Hit with Separate AI-Washing Securities Lawsuits, The D&O Diary (Mar. 10, 2025), https://www.dandodiary.com/2025/03/articles/securities-litigation/two-companies-hit-with-separate-ai-washing-securities-lawsuits/.
2. "SEC Charges Leading Public Company and Senior Executives with Fraud," U.S. Securities and Exchange Commission (Feb. 15, 2024), https://www.sec.gov/newsroom/press-releases/2024-36.
3. Sarkar & Smith "Mitigating Board and Corporate Fiduciary Risks of AI," Risk Management (Feb. 6, 2025), https://www.rmmagazine.com/articles/article/2025/02/06/mitigating-board-and-corporate-fiduciary-risks-of-ai.