Artificial intelligence isn’t science fiction anymore. Today, it’s powering everything from chatbots in medical offices to predictive analytics in marketing firms. But what happens when AI makes a mistake? Who pays when a client sues over a financial loss caused by faulty algorithms or misguided advice generated by software?
These are the emerging questions at the crossroads of AI and
insurance, and they matter for every business weaving smart technology into daily operations.
Key Takeaways
If AI influences your advice or decisions, you’re accountable for the outcome—this is AI and insurance territory.
General liability won’t help; you need errors and omissions (E&O) insurance (professional liability).
What is errors and omissions insurance? Protection for service mistakes, bad outputs, or missed deliverables.
What does errors and omissions insurance cover? Legal defense, court costs, and settlements for client claims. Tech E&O insurance is purpose-built for software/AI failures.
Why Insurance Matters in the Age of AI
AI can help us do amazing things, but it’s not infallible.
Consider a consulting firm that relies on predictive modeling software to guide client investments. If the model miscalculates and causes losses, the client may demand compensation. Or imagine that a healthcare practice’s AI scheduling software double-books a high-risk procedure, resulting in delays and potential patient harm.
The FTC has warned that companies deploying AI are still responsible for the accuracy and fairness of the technology they use, especially when it impacts consumers. That means liability ultimately lands on the business, not the algorithm.
Traditional liability coverage often excludes these kinds of mistakes, leaving many organizations exposed. That is, unless they secure
professional liability insurance, commonly called errors and omissions (E&O) insurance.
What Is Errors and Omissions Insurance?
At its core, E&O insurance protects businesses that provide advice, consulting, or tech services against claims of negligence, inaccurate advice, or professional mistakes.
If a client sues, an E&O policy can help cover:
Legal fees and court costs
Claims processing expenses
Settlements or judgments
Defense costs, even if the claim proves groundless
In short, E&O coverage acts as a financial backstop, so you don’t have to shoulder the full cost of litigation that could derail your operations.
What Does Errors and Omissions Insurance Cover in Tech?
For technology-driven businesses, the scope of errors and omissions coverage is especially relevant. Depending on your policy,
tech E&O insurance may help protect against:
Mistakes in software development or system implementation
Inaccurate advice from professional services relying on AI
Data breach liability involving confidential client information
Failures in business operations caused by faulty algorithms
Financial loss stemming from reliance on erroneous outputs
This protection goes beyond
general liability, which primarily covers bodily injury or property damage. Tech E&O closes the gap for intangible risks that are increasingly common in a digital-first economy.
Professional Liability Insurance vs. Errors and Omissions Insurance
Professional liability insurance and errors and omissions (E&O) insurance are two names for the same type of coverage.
The term “professional liability” is more common in industries like medicine, law, and accounting, where it’s sometimes called malpractice insurance. “Errors and omissions insurance” is the label most often used in technology, consulting, marketing, and financial services.
No matter what you call it, both protect businesses from claims of negligence, misrepresentation, mistakes, or failure to deliver professional services.
Professional Liability Insurance
- Common industries: Medicine, law, architecture, accounting
- What it covers: Claims of negligence, malpractice, misrepresentation, failure to deliver services
- Note: Often referred to as malpractice insurance in healthcare and legal fields
Errors & Omissions (E&O) Insurance
- Common industries: Technology firms, consultants, financial advisors, marketing agencies
- What it covers: Mistakes in advice, software errors, inaccurate forecasts, failures in professional services
- Note: Common term in tech and business services industries
Both
- Common industries: Any business providing professional services
- What it covers: Legal fees, court costs, settlements, defense expenses, compensatory damages
- Note: They are the same type of coverage, though some insurance providers may structure the policies slightly differently or include varying coverage limits and exclusions.
Specialized Liability Risks by Industry
AI is becoming standard across industries, which means liability risks are spreading, too:
Startups and tech consultants: Algorithms that fail to deliver promised results.
Marketing firms: AI-generated campaigns producing misleading claims.
Medical offices: Misfiled or mishandled patient data due to AI-driven systems.
Financial advisors: Automated tools produce inaccurate forecasting.
Each scenario can spark errors and omissions claims that demand defense, settlement, and in some cases, ongoing monitoring of compliance.
Real-World Scenarios
The following examples may involve big-name companies, but they set a precedent, and small businesses are just as much at risk. Without the right coverage, any business dealing with AI could face devastating out-of-pocket costs.
Air Canada’s chatbot case (2024): A Canadian tribunal ruled the airline liable after its website chatbot gave a traveler incorrect bereavement-fare information. The key point: you can’t blame “the bot”—the company owns what its AI says.
Workday hiring-bias lawsuit (2024–2025): A federal judge let a proposed class action proceed, finding the AI vendor could potentially be held directly liable under anti-discrimination laws for screening tools that allegedly disadvantage protected groups.
UnitedHealth AI-denial suit (2025): A judge allowed contract and good-faith claims to continue in a case alleging an AI model wrongfully curtailed seniors’ post-acute care. This underscores that insurers remain accountable for decisions their algorithms influence.
Tesla Autopilot verdict (Aug. 2025): A Miami federal jury found Tesla partially at fault in a fatal crash and awarded more than $240M, citing how the driver-assist system failed to prevent or warn of danger on a road it wasn’t designed for.
Bottom line for risk management: Judges aren’t accepting “the AI did it” as a defense. If AI touches client advice, pricing, eligibility, or safety, that risk still rolls up to the business, meaning your contracts, documentation, human oversight, and tech E&O/professional liability strategy need to be tight.
Does General Liability Insurance Protect Against AI Mistakes?
No. General liability insurance is designed to address physical risks like bodily injury or property damage. It won’t step in when a client suffers financial loss from professional services or technology errors, which is why E&O insurance is a critical safeguard for firms using AI.
What Happens If a Client Sues Over an AI-driven Mistake?
With E&O coverage in place, you can file a claim with your insurance carrier to help cover defense costs, settlements, and related expenses. This protection keeps your business operations steady and shields your balance sheet while the legal process plays out.
How Does the Underwriting Process Work for E&O Policies?
When underwriting an E&O policy, insurers take a close look at your business practices, client contracts, and past claims activity.
Strong risk management measures, such as clear documentation and compliance protocols, can help you secure more favorable terms and premiums.
What Kinds of Businesses Need E&O Insurance?
Any organization that provides professional services, advice, or technology solutions should consider E&O coverage. From startups and consulting firms to healthcare practices and marketing agencies, this protection helps ensure that one misstep or AI-generated error doesn’t turn into a financial crisis.
Protect Your Business from Emerging Risks
AI brings opportunities, but it also creates uncharted liability risks. With the right E&O insurance, you can innovate confidently, knowing your business has a safety net against mistakes, even those made by machines.
AI may introduce new risks, but it doesn’t have to put your business on unstable ground. At Pepper, Johnstone & Company, we tailor coverage for businesses at the intersection of technology and professional services. As an independent insurance agency, we work with multiple carriers to build solutions that fit your unique exposures.
Don’t wait for an AI-driven error to test your resilience. Contact Pepper, Johnstone & Company today to review your liability coverage and secure a policy that protects your future.
Get a Customized Insurance Quote for Unique Businesses Like Yours
Let Pepper, Johnstone & Company create comprehensive insurance coverage to fit your operations and safeguard against emerging liabilities. Call us today at 866-381-5821 or request a quote online to strengthen your protection before the next claim arises.
Sources:
AP News: “Jury orders Tesla to pay more than $240 million in Autopilot crash case”
Federal Trade Commission: “FTC Announces Crackdown on Deceptive AI Claims and Schemes”
The Guardian: “Air Canada ordered to pay customer who was misled by airline’s chatbot”
Reuters: “Workday must face novel bias lawsuit over AI screening software”
Stat News: “Judge rules lawsuit over UnitedHealth’s AI care denials can move forward”