Artificial intelligence is the buzzword of the decade, promising to revolutionize industries and drive business growth. But as companies scramble to showcase their AI prowess, a new risk is emerging: AI washing. This phenomenon—where businesses exaggerate or even fabricate their AI capabilities—has caught the attention of investors, regulators, and insurers alike.
The Allure and Danger of AI Hype
Imagine a company announcing a breakthrough AI-powered product, sending its stock price soaring. Investors rush in, excited by the promise of cutting-edge technology. But what if those AI claims are more fiction than fact? This is the heart of AI washing, and it’s not just a harmless marketing ploy. As seen in past trends like greenwashing, overstating capabilities can lead to serious legal and financial consequences.
Ray Ash, head of financial lines at Westfield Specialty, draws a parallel to the COVID-19 era, when companies hyped unproven treatments. "Some companies are claiming AI capabilities they don’t actually have, which can artificially inflate share prices and eventually lead to securities litigation," he warns.
Lawsuits on the Rise
The courtroom is already seeing the fallout. Nora Hattauer, head of financial lines at Zurich North America, notes a surge in securities class actions where companies projected massive revenue growth from AI, only to fall short. According to research from Cornerstone Research and Stanford Law School, lawsuits alleging misleading AI claims more than doubled to 15 in 2024.
Often, companies lean into tech buzzwords to win investor favor, but when reality doesn’t match the hype, share prices tumble and lawsuits follow. Even without aggressive regulatory action, the threat of litigation is real. "Securities class actions don’t always require an SEC action to move forward," Hattauer explains. "Even in the absence of regulatory enforcement, the plaintiffs’ bar will still be active."
Why AI Washing Is So Risky
AI is complex and often misunderstood—even in boardrooms. This makes it easy for companies to overstate their capabilities, sometimes without realizing they’re crossing a line. For insurers, this means greater exposure under directors and officers (D&O) policies, which protect executives from claims of misrepresentation or negligence. But with limited transparency around actual AI deployment, assessing risk is a challenge.
Regulatory enforcement is still in its early stages, but that doesn’t mean companies are off the hook. Statutes of limitations can extend for years, and scrutiny is increasing, especially for financial institutions and asset managers using AI in critical operations.
How Companies Can Protect Themselves
So, what can businesses do to avoid the pitfalls of AI washing?
- Be Transparent: Clearly document your AI strategy, including what’s being implemented and how it’s communicated to the market.
- Treat AI as a Core Business Risk: Integrate AI oversight into your enterprise risk management (ERM) practices, just like cybersecurity.
- Maintain Good Governance: Hold regular board meetings to discuss AI initiatives and ensure decisions are well-reasoned and in the best interest of shareholders.
- Think Long-Term: Even if regulatory enforcement is light now, penalties could come later. Don’t assume today’s environment will last forever.
By taking these steps, companies can build trust with investors and reduce the risk of costly litigation or reputational harm.
Key Takeaways
- AI washing is the practice of overstating or fabricating AI capabilities, and it’s leading to a rise in lawsuits.
- Legal and financial risks are significant, even if regulatory enforcement is still developing.
- Transparency, governance, and risk management are essential to avoid AI washing pitfalls.
- D&O insurance can help, but insurers are becoming more cautious as claims rise.
- Companies should act now to protect themselves and their investors from future fallout.