Francesco Palanda’s Practical Guide for Mitigating AI-Related Business Interruption Risk

Begin by identifying how your client uses AI across its business. Counsel should determine whether the client’s AI use supports limited functions or is central to revenue generation and decision-making. When AI systems play a critical operational role, disruptions or errors can quickly create significant financial consequences.

Counsel should understand the client’s AI systems, including whether they use machine learning for prediction or generative AI for content creation. You should also assess inputs, outputs, third-party dependencies, and the risk of inaccurate outputs or “hallucinations.”

Counsel should assess the financial impact of AI failures or inaccurate outputs. Unlike traditional outages, AI-related losses often stem from reliance on flawed data rather than downtime, potentially leading to lost revenue, reputational harm, or contractual liability without any physical disruption.

Attorneys should assess whether their client has safeguards to identify and address AI errors, including:

• • Human review of critical outputs
  • Validation and testing protocols
  • Ongoing system monitoring
  • AI-specific incident response procedures

Without these controls, clients may face greater exposure and a more difficult path to insurance recovery.

Traditional insurance policies may not cover AI-related losses when they lack the required element of physical damage. Cyber policies, however, may offer alternative paths to recovery, as courts have begun to recognize business interruption losses from cyber events even in the absence of traditional physical damage.

Counsel should therefore review cyber, errors and omissions (E&O), and other specialty policies to determine whether they may address AI-related risks.

Lastly, where coverage gaps exist, attorneys should advise clients on specialized options, including enhanced cyber or technology E&O policies that address non-physical business interruption, algorithmic errors, and data-integrity risks. As insurers develop AI-specific products, policyholders should work with brokers and counsel to ensure emerging risks are adequately covered.