AI Washing Insurance Claims — A Call for Transparency

Understanding AI Washing

As AI continues to evolve and show its benefits, companies have been doing their best to adopt it and improve their operations. According to McKinsey, 65% of surveyed organizations are already using the technology, which is double the amount reported just 10 months before.

However, as AI has become appealing to both consumers and investors, some companies may be overstating its involvement in their products, whether that’s to become newsworthy or appeal to industry players. This practice has been referred to as “AI washing.”

One of the most common practices of AI washing is downplaying the role of humans in technology. In fact, Amazon was recently accused of it in their “Just Walk Out” tech, which allows people to go to their stores and simply walk out with items, then be billed afterward. The company seemingly attributed Indian workers a much smaller role than they actually played in the process of checking transactions.

Other ways companies heighten their AI credentials are by being purposefully vague about their AI technology and exaggerating software features that aren’t really ‘intelligent’.

Just like companies shouldn’t lie about their products’ capabilities — like the founder of electric truck company Nikola, who was sentenced to four years in prison for misrepresenting the trucks to investors — they shouldn’t make claims about their AI integrations either.

Such actions can lead to defrauding investors, losing client and partner trust, fewer positive business results, a tarnished reputation, and marketing a substandard product only a marketing approach that won’t live up to promises made.

The Dangers of AI Washing for Consumers and Companies

Risks for Consumers

The biggest risk of AI washing is harming consumers. Let’s say a company claims its HRtech product uses AI to automate tasks, summarize text, and notify employees whenever a performance review is due.

However, the AI capabilities are minimal in its software, resulting in faulty document summaries, failing to schedule meetings, and performing automation poorly. These mistakes can snowball into bigger operational issues on the HR level, ultimately affecting users and their work.

What’s more, users might end up overpaying for these deficient services, causing them financial harm on top of potential reputational damage.

Risks for Companies

Companies can run into even more trouble when trusting an AI-washed product. Besides overpaying for services that don’t live up to their promises, they might incur operational interruptions or errors that could affect their clients and employees, and ultimately their reputation.

For example, if a grocery store uses Amazon’s “Just Walk Out” service without knowing about the heavy involvement of Indian workers, they might not know that they’re overpaying for these additional employees. Plus, the inaccurate AI credentials could mean that not all products are being billed, resulting in financial losses.

Down the road, companies could also receive claims that certain AI-washed products led them to incur in regulatory violations (like unknown human involvement in AI applied to HIPAA-regulated processes), which involves legal issues bringing worrisome consequences, like loss of trust and hefty lawsuits and fines.

A Closer Look at AI Washing Claims

Now, how can AI washing affect the insurance sector? Evidently, the more AI advances and continues garnering investor interest, the more AI washing insurance claims will arise. Whether companies are seeking protection from AI washing allegations or suing a company incurring it, the insurance industry is gearing up to take on this new kind of claim.

It’s also very possible for companies to AI-wash unintentionally, in which case insurance can support them if they face such accusations.

A typical claim in AI-based claims that case might look like this: An e-commerce hosting platform makes a software update that includes AI services that analyze customer data and predict or suggest their next purchase. However, AI is minimally involved in data analysis that segments clients into groups to send human-made marketing emails. The company advertised this update to fully center on AI capabilities while failing to clearly disclose how the technology was used. When the product isn’t as ‘intelligent’ as users expected, a lawsuit is filed against them.

SEC Enforcement Actions

As lawsuits keep coming, the Securities and Exchange Commission (SEC) has become laser-focused on vetting securities that claim to use AI-related technologies to protect users and investors. For example, the agency pressed charges and settled against two financial advisers for misrepresenting their AI usage. One of the first civil penalties of $225,000 was paid by Delphia, as the company claimed use of AI and machine learning to predict investment trends, which the SEC found to be false.

In another case, the agency announced litigated charges against the CEO of a company who, according to Gurbir Grewal, Director of the SEC’s Division of Enforcement, “engaged in old school fraud using new school buzzwords like ‘artificial intelligence’ and ‘automation’.”

Grewal has expressed that companies should ask themselves whether their representations of AI and new technologies are accurate or simply a means to attract investors. He also urged investment markets surrounding AI to beware of companies misleading them by exploiting the term.

What’s true is that the SEC Chair Gary Gensler and other officers are cracking down on AI washing and showing no signs of backing down, pursuing these cases for the sake of transparency and investor and consumer well-being.

AI Washing Insurance Claims Morph Into D&O Litigation

Although the SEC is clearly on the case, executives can still be at risk of facing litigation from independent parties. Just like the SEC went after a CEO for his AI washing claims, so could investors, partners, and consumers take legal action against company directors for misleading statements.

This is how directors and officers (D&O) liabilities arising blend in with AI washing claims, which is changing the scope of insurance companies’ coverage for organizations using AI. The moment a business ties itself to this technology, it might be time to reevaluate insurance coverage packages to further protect leaders against these looming risks — a conversation we’ve been having more and more with insureds in recent times.

Best AI Practices for Tech-Enabled Companies

Innovation has never come without risk and, at a time when AI-related services are becoming the norm, companies should consider the hazards of doing so and ways to mitigate them. The first and most important consideration to avoid wrongful claims is integrating AI technologies ethically and responsibly.

This isn’t just to avoid future risks of litigation — using AI correctly by removing bias, keeping it supervised, and properly training it with quality data helps companies deliver the best service and stay truly competitive.

The moment a company adopts AI it must also outline an AI governance strategy. It should manage risks by involving cross-departmental collaboration to keep the business in check about its AI usage. Some important questions to ask are:

• How is the legal department getting involved?
• Which guardrails are being set to ensure the safe use of AI?
• How are teams being trained and made aware of AI risks?

In the same vein, a major part of mitigating risks and claims includes choosing the right insurance. Rampant adoption has made it so that insurers are prepared to protect businesses against wrongful AI washing and other product liability claims with tailored AI insurance.

However, these potential threats shouldn’t discourage companies from improving their services with AI. At the end of the day, this technology is delivering immense value by automating tasks, analyzing massive amounts of data and generating accurate , and reducing human error in many processes. As long as it’s integrated responsibly and transparently, companies should charge ahead confidently.