Big Insurance Backs Away From AI Risk and Startups Rush In

A company deploys an artificial intelligence (AI) agent. The agent makes a mistake. The insurance policy does not cover it.

That outcome is no longer hypothetical. Major insurers are carving AI out of standard corporate coverage. State regulators are approving the requests and a new market is already forming to fill the gap.

Carriers Signal They Cannot Price the Risk

Berkshire Hathaway, Chubb and Travelers sought state regulatory approval to exclude AI-related damages from general liability policies. State regulators approved more than 80% of those requests, The Information reported. Florida, Connecticut and Maryland approved the highest number of requests. The exclusions began taking effect as early as January.

The moves follow two new optional endorsements introduced by the Insurance Services Office, a private body that sets industry standards. Policyholder Pulse reported that some carriers, including Berkley, have introduced absolute AI exclusions across directors and officers, errors and omissions and fiduciary liability policies. The endorsements cover bodily injury, property damage and personal and advertising injury tied to generative AI outputs, including defamatory content, intellectual property infringement and physical damages traceable to AI-driven errors.

PHL Firm noted that ISO forms underpin roughly 82% of U.S. property and casualty policies. Adoption is expected to be rapid. Many carriers will attach these endorsements at renewal.

What Falls Outside Coverage Now

Plaintiffs have advanced a wide range of legal theories in AI-related filings. Policyholder Pulse catalogued the categories: copyright and intellectual property claims arising from large language model training, privacy and data-use claims, antitrust claims, discrimination and algorithmic bias claims and AI-related securities class actions. Each now sits in a grayer zone for businesses whose carriers have secured AI exclusions.

Insurers are also moving to cap AI losses in cybersecurity policies, the Financial Times reported. That narrows options across multiple policy types at once. Policyholder Pulse flagged that courts have not yet settled how broadly these exclusions will be applied and that for some policyholders the effect could render their coverage illusory. PHL Firm found that small to mid-sized firms, often without specialized coverage, face the greatest exposure.

A New Market Fills the Gap

Specialized firms are stepping in. Munich Re and startups including Corgi, Armilla, Mayflower Specialty and Embroker now offer standalone AI liability policies, The Information reported. Coverage limits range from $2 million to $50 million. Premiums range from a few hundred dollars to several hundred thousand dollars annually.

The pattern mirrors how insurers handled cybersecurity a decade ago. A wave of attacks triggered corporate claims. Businesses argued successfully that traditional policies covered the losses because the policies did not explicitly exclude them. Insurers carved cyber out of standard coverage and built standalone products. That market matured. Now, the AI liability market is starting the same process.

The tension sits inside the industry itself. PYMNTS reported that insurance giants are deploying AI agents to orchestrate entire workflows across claims, underwriting and policy servicing. Those same carriers are simultaneously pulling AI coverage from the policies they sell. PYMNTS also reported that AI is beginning to transform underwriting itself, compressing timelines and changing how risk gets priced. Insurers are betting on AI internally while refusing to absorb AI risk externally.

PHL Firm advised businesses to review existing policies for new endorsements with their brokers and consider seeking affirmative AI coverage through technology errors and omissions policies, cyber liability insurance, or emerging standalone AI products. Strengthening internal AI governance, conducting bias testing and disclosing AI use can also reduce exposure.

Insurers are not saying AI is uninsurable. They are saying they do not yet know what it costs. Until they do, the risk sits with the businesses deploying the technology.