Lloyd’s of London insurers have introduced a new product to cover losses caused by malfunctioning AI tools.
The product protects companies against legal claims relating to issues such as chatbot errors and hallucinations.
Indeed, if an AI tool harms customers or third parties, the insurance may cover costs such as damages and legal fees.
The policy, developed by Armilla - a specialized AI insurance and assessment solutions provider - and underwritten by multiple Lloyd’s insurers, underscores the growing need for risk management in AI adoption.
Karthik Ramakrishnan, CEO of Armilla, believes this coverage could encourage hesitant businesses to adopt AI tools without fearing catastrophic failures.
According to Ramakrishnan, while some insurers have already included AI-related losses within broader technology policies, these generally come with low payout limits, leaving businesses vulnerable to large-scale AI failures.
"We assess the AI model, get comfortable with its probability of degradation, and then compensate if the models degrade," he told the Financial Times.
Armilla’s policy provides performance-based coverage, meaning payouts are triggered only if the AI performs significantly below its initial expectations.
For instance, if a chatbot initially provided correct information 95 percent of the time but its accuracy later dropped to 85 percent, the insurance could cover associated losses.
This selective underwriting approach ensures that insurers only cover sufficiently reliable AI systems, limiting exposure to excessively flawed technologies.
Where Have We Seen Things Go Wrong in Customer Service?
There are increasing instances of AI errors, from comical mishaps to more reputationally damaging hallucinations.
Take Virgin Money, for example. A chatbot reprimanded one unsuspecting customer for using the word ‘virgin’ in a customer service query.
In the original exchange, David Burch asked: "I have two ISAs with Virgin Money; how do I merge them?"
In what can only be seen as the AI version of a teenager’s bashful response to such a question, the bank’s chatbot responded: "Please don’t use words like that. I won’t be able to continue our chat if you use this language," deeming the word "virgin" inappropriate.
On the more serious side, a small claims court ruled that Air Canada should compensate one of its customers who was misled into paying for full-price flight tickets by a contact center chatbot.
