The growing question for Directors and Officers insurers will be whether their policies cover a director or officer who makes false claims about their company’s artificial intelligence technology, known as AI washing.
A US Attorney’s Office in New York has charged a director with AI washing. According to the US Attorney concerned the director “misled investors by exploiting the promise and allure of AI technology to build a false narrative about innovation that never existed. This type of deception not only victimises innocent investors, it diverts capital from legitimate startups, makes investors sceptical of real breakthroughs, and ultimately impedes the progress of AI development.”
The directors and the company claimed AI abilities for its App which did not exist. They claimed the ability, above competitors, to intelligently and quickly complete retail transactions across all e-commerce sites through the use of AI technology. The claim for autonomously completed online purchases was allegedly false. In reality the App did not use AI to autonomously navigate the checkout process for purchases on behalf of users. The Apps actual automation rate was effectively 0% and the company heavily relied on teams of human workers – primarily located overseas – to mutually process transactions in secret that were allegedly being done by automation. The company raised more than $40 million from multiple investors based in part on the misrepresentations to investors about the company’s development and deployment of AI. The director has been charged with securities fraud.
If the facts alleged by the US Attorney are correct, this is a clear case of fraud that would not be covered by a D&O policy. The door is open however to liability for misstatements and other breaches of the fiduciary obligations of directors exaggerated in relation to claims of the alleged AI abilities of a company when attracting investors or business. The temptation with the rapid advance of AI is to assert that the company is ahead of the curve. This may not be due to fraud or dishonesty but to misunderstanding of AI technology, exaggeration, or optimism. Where losses are suffered, D&O cover may play a role. AI washing is not always done in muddy water.