In an era where AI is increasingly providing more interaction with people, new risks are emerging that demand a new approach to insurance. In some of the insurance industry’s first moves, insurance companies are announcing new insurance policies that cover risks like AI hallucinations and model drift, marking a significant step in AI risk management.
In a move to address the evolving risks associated with artificial intelligence (AI), Chaucer Group, a global specialty reinsurance company, has partnered with Armilla AI to launch a new third-party liability (TPL) insurance product. This policy is designed to cover liabilities arising from the mechanical under-performance of AI systems, including issues like AI hallucinations, model drift, and other deviations from expected behavior.
Understanding the Need for AI Liability Insurance
As AI technologies become increasingly integrated into various industries, the potential for unforeseen failures and associated liabilities has grown. Traditional insurance policies often lack specific provisions for AI-related risks, leaving businesses exposed to significant financial and legal challenges.
“At Chaucer, we believe that AI is reshaping the risk landscape, and that requires fresh thinking from the insurance market, ” said Tom Graham, Head of Partnership and Innovation at Chaucer.
The company recently announced a partnership with Armilla AI that enabled them to co-develop a product that “not only recognises the complexities of AI underperformance but provides meaningful coverage that supports innovation, transparency, and accountability,” as stated by Graham.
The newly launched TPL insurance product offers comprehensive coverage for various AI-related risks such as coverage for false or misleading outputs generated by AI systems, protection against performance degradation of AI models over time, insurance for other deviations from expected AI behavior, and provision for legal defense and liability protection for claims arising from AI under-performance.
This policy is available to U.S.-based clients with global territorial limits, ensuring broad applicability for businesses operating internationally.
AI Implications for the Insurance Industry
The introduction of AI-specific liability insurance represents a significant advancement in the insurance industry’s approach to emerging technologies. By addressing the unique risks posed by AI, insurers can provide more tailored and effective coverage options for businesses.
The development of Chaucer’s insurance product stems from a collaboration that began when Armilla AI participated in a Lloyd’s Lab cohort focused on Insurtech innovation. Chaucer has actively supported Armilla’s growth, including sponsoring its coverholder application at Lloyd’s.
This move also highlights the importance of cross-industry collaboration in developing solutions for complex technological challenges. By combining Chaucer’s expertise in insurance with Armilla AI’s deep understanding of AI systems, the partnership exemplifies how diverse skill sets can come together to address modern risks.
As Goes Technology, So Too Goes Insurance
As AI continues to evolve and integrate into various sectors, the need for specialized insurance products will likely grow. Businesses adopting AI technologies must consider the potential risks and ensure they have appropriate coverage to mitigate potential liabilities.
Other insurance industry firms have announced similar approaches to insuring emerging AI risks. In January 2025, Relm Insurance launched a suite of AI liability insurance products designed to provide tailored coverage for companies developing or integrating AI technologies. These solutions aim to address the unique risks posed by AI, including potential liabilities arising from AI system failures or unintended behaviors.
Munich Re offers an AI Warranty Insurance product that enables companies to mitigate risks associated with the underperformance, unreliability, and drift of machine learning models. This coverage is particularly beneficial for businesses that develop or deploy AI solutions, providing financial protection against specific underperformance scenarios.
In early 2024, cyber liability insurer Coalition introduced a policy endorsement aimed at covering risks associated with generative AI technologies. This endorsement addresses potential liabilities stemming from the use or misuse of generative AI, such as data poisoning, infringement, and regulatory violations.
Insurance firm AXA also released new endorsements for its cyber insurance policies that specifically addresses risks related to generative AI. This development reflects the evolving nature of AI-related risks and the insurance industry’s efforts to provide comprehensive coverage for such emerging threats.
No doubt as the insurance industry seeks to proactively address the challenges posed by emerging technologies, by focusing on coverage for AI-related risks, the insurance industry is helping to support the responsible and confident adoption of AI across industries. As AI becomes more prevalent, such innovative insurance solutions will be crucial in managing the associated risks and ensuring that businesses can harness the benefits of AI with confidence.
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