Insurer AI Exclusions Spark Policyholder Alarm on Coverage Gaps

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Companies that develop or use AI-generated content will likely either find themselves on the hook for any related litigation or regulatory probes or paying through the nose for insurance coverage as carriers race to limit their own liability.<br>Some insurers in recent months have adopted exclusions, based on standard policy language made available last year by Verisk Analytics Inc.'s Insurance Services Office, over claims related to generative artificial intelligence, according to industry professionals. Those exclusions, which insurers can attach to commercial general liability policies, focus for now on losses from bodily injury, property damage, or personal and advertising injury arising from policyholders’ use of generative AI.<br>Some carriers are going even further. W. R. Berkley Corp. announced a first-of-its-kind “absolute” AI exclusion last year, including for claims against a policyholder’s directors and officers.<br>Those provisions, some of which go beyond the use of generative AI, are poised to leave policyholders exposed to a wide range of claims, including over their AI-related disclosures and how they oversee the technology in their business operations.<br>“Given that everything including our phones with Google now uses AI, I don’t know how anything would be left if there is a broad AI exclusion,” said Reed Smith LLP partner Courtney Horrigan, who represents policyholders.<br>While courts have yet to issue a bellwether ruling on insurance coverage for companies’ losses stemming from their use of generative AI, the stakes are sky-high for policyholders and their carriers.<br>Generative AI-related lawsuits in the US surged by 978% from 2021 to 2025, according to a report from broker Gallagher Re.<br>AI litigation more broadly has targeted tech giants such as Anthropic PBC and Microsoft Corp. over their use of copyrighted materials from authors and newspaper publishers to develop AI tools, while other companies stand accused of “AI-washing” — making misleading statements to investors or consumers over AI capabilities.<br>Many companies “are already relying on systems they cannot fully interrogate, using outputs they do not always challenge, within frameworks that are still evolving,” according to a May report on AI risks by insurance broker Willis Towers Watson Plc.<br>Some insurers may ultimately adopt narrow exclusions for AI-related claims or offer new product lines to cover them, but policyholders will likely face coverage gaps or expensive premiums in any event, industry professionals said.<br>“In the immediate future, harm to policyholders is expected, particularly for companies that fail to identify the extent to which AI is embedded in their operations,” Alana McMullin, a policyholder-side partner at Lathrop GPM LLP, said by email. “And narrow exclusions will still create hidden coverage gaps, especially when different policies treat AI differently.”<br>Data Centers<br>To appreciate the exponential increase in risks for policyholders and their insurers stemming from AI, consider a company facing property damages at a data center used to operate generative AI and other tools.<br>“Imagine if there’s a fire or tornado and the data center goes down for a week or a month,” said Ben Lenhart, a co-chair of Covington & Burling LLP’s insurance recovery practice group. “Think of the profits that have been lost.”<br>Those potential losses could be in the “hundreds of millions, if not a billion” dollar range, Lenhart said.<br>And that doesn’t include litigation that could arise from downstream vendors, customers, or regulators.<br>An average 100-megawatt data center, for example, could generate more than $1 billion in annual profits, said Michael Levine, a Hunton Andrews Kurth LLP partner who leads the firm’s property, casualty, and emerging issues insurance practices. If the center went down, it could experience a business interruption loss equaling about 70% of its profit total that would typically be covered by property insurance but may be excluded under the new AI provisions, he said.<br>“It is far beyond anything that...