Artificial Intelligence (AI) Startups: 5 Essential Insurance Coverages You Need

Artificial Intelligence (AI) and the advancement of LLM’s are reshaping almost every industry and daily life. From creating art and music to assisting developers in writing code more efficiently, AI applications are vast and varied. However, with these opportunities come unique risks. The legal challenges associated with AI development and use have only begun. From intellectual property infringement challenges to potential discrimination in the outputs of the models. As AI companies navigate uncharted territories, securing the right insurance coverage becomes essential to protect against potential liabilities and unforeseen challenges.

Why AI Startups Need Specialized Insurance

Operating in the AI sector involves handling large datasets, developing predictive models, and delivering recommendations that can significantly impact users and businesses. These activities expose startups to specific risks, including data breaches, intellectual property disputes, and claims arising from the unintended consequences of AI outputs. Comprehensive insurance coverage provides a safety net, ensuring that AI startups can focus on innovation without compromising financial stability.

Essential Insurance Coverages for AI Startups

Technology Errors & Omissions (Tech E&O) and Cyber Liability Insurance

Tech E&O insurance is crucial for AI companies, covering claims related to professional negligence, errors, or omissions in the services provided. Often included in the Tech E&O policy, cyber liability insurance complements this by addressing risks associated with data breaches and cyberattacks. For instance, if an AI-driven recommendation system provides faulty advice leading to client losses, Tech E&O can cover legal expenses, while cyber liability insurance can address costs related to data breaches involving sensitive information.

General Liability Insurance

This foundational coverage protects against claims of bodily injury or property damage occurring on your business premises or due to your operations. For AI startups, especially those with physical offices, making hardware products, or hosting events, general liability insurance is essential. It works in tandem with Tech E&O to provide a comprehensive shield against various liabilities.

If you are a software-only company, this isn’t your most prominent risk, but it will be extremely low cost as well. With a good Tech E&O policy, it creates a well-rounded insurance program. Additionally, most Tech E&O providers will require that you have GL coverage before purchasing Tech E&O.

Directors & Officers (D&O) Insurance

D&O insurance safeguards the personal assets of your company’s directors and officers in the event they are sued for alleged wrongful acts in managing the company or misrepresentation to investors. Given the rapidly evolving regulatory landscape surrounding AI, this coverage is vital. Investors and board members often require D&O insurance as part of their involvement, ensuring that leadership can make strategic decisions without undue personal risk.

Intellectual Property (IP) Infringement Insurance

AI startups frequently deal with complex IP issues, from developing proprietary algorithms to utilizing existing datasets. IP infringement insurance provides coverage in two key areas:

• Defensive Coverage: Protects your company if sued for allegedly infringing on another party’s intellectual property rights.
• Offensive Coverage: Covers legal expenses incurred when pursuing action against another entity for infringing on your IP.

While defensive coverage is often included in Tech E&O policies, offensive coverage may require a separate policy. Securing both ensures that your innovations are protected and that you have recourse in the event of IP disputes.

Workers’ Compensation Insurance

If your AI startup has employees, workers’ compensation insurance is typically mandated by law. It covers medical expenses and lost wages for employees who suffer work-related injuries or illnesses. Even in tech environments considered low-risk, having this coverage is essential. For remote teams, this can be tricky since the laws have not caught up with the remote world that we live in. You have to ensure compliance by listing each state where employees reside on your policy, as regulations can vary.

Navigating Insurance Challenges for AI Startups

Securing appropriate insurance can be complex for AI companies due to the novelty and rapidly evolving nature of the industry. Insurers may be unfamiliar with the specific risks associated with AI, leading to potential coverage gaps or higher premiums. To address these challenges:

1. Work with Specialized Brokers: Engage insurance professionals experienced in the tech sector who understand the unique exposures of AI businesses.
2. Implement Robust Risk Management Practices: Demonstrating proactive measures, such as data protection protocols and good contractual language can make your startup more attractive to insurers.
3. Regularly Review and Update Coverage: As your AI startup evolves, periodically reassess your insurance needs to ensure continuous and adequate protection. The insurance available to AI startups is changing about as fast as AI is changing, there will be new carriers come into the market and some that will leave over the next couple of years.

Conclusion

For AI startups, navigating the unknown legal challenges of artificial intelligence and risk requires a strategic approach to insurance. By securing the right mix of coverages—including Tech E&O, general liability, D&O, IP infringement, and workers’ compensation—you can protect your company against unforeseen challenges. Give us a call and we can help get you with proven insurance companies in this space to protect your investment in your startup.