Businesses and professionals are increasingly reliant on artificial intelligence (AI), but what happens when AI gets something wrong?
For businesses, AI hallucinations aren’t just a technical issue; they create legal, financial, reputational and operational risks that need to be insured against.
To avoid claims, complaints or even lawsuits, it’s critical business leaders treat their AI use like any other essential system, with oversight, controls and accountability.
What are AI hallucinations?
If your business uses, creates or offers AI solutions, hallucinations are one of your biggest challenges.
A hallucination is when an AI system generates incorrect, misleading or fabricated information while presenting it as fact. It can expose businesses to liability risks, misinformation damage, regulatory breaches and financial loss.
What causes an AI hallucination?
AI hallucinations are caused by incomplete or biased training data, ambiguous or poorly structured prompts and over-generalisation from patterns in data.
Because AI models, especially large language models (LLMs), are trained on vast datasets and designed to predict the most likely sequence of words rather than verified facts, errors are inevitable unless mitigated.
What are the key risks?
Depending on whether you are creating or using AI, there are three main risks:
- Professional liability and misinformation
If your AI tool gives incorrect advice or its outputs mislead customers and damage decision-making, your client might suffer a loss and may make a claim. - Regulatory and data risks
If AI outputs contain or share incorrect personal data or generate a biased decision, you could face issues under GDPR or consumer protection rules. Likewise, if your AI system inappropriately uses personally identifiable information in its training data, you could face claims from data subjects and your clients. - Reputational damage
If a customer-facing AI tool like a chatbot gives inaccurate information the most immediate risk is damage to brand credibility. In industries where trust is paramount like finance or healthcare even a single incident can have lasting consequences.
How to mitigate the hallucination risks
You can’t eliminate hallucinations entirely, but you can mitigate the risks with the right strategies:
- Keep people in the loop
Ensure critical outputs, especially those affecting customers or strategy, are reviewed by your people. - Use retrieval-augmented generation (RAG)
Connect AI systems to trusted, up-to-date data sources to ensure responses use verifiable information. - Establish guardrails and validation checks
Apply rules that flag uncertain outputs, require citations, andlimit responses in high-risk scenarios, and evaluate performance to identify patterns of hallucination and improve system accuracy. - Train staff and your clients
Employees and clients should understand that AI is not an infallible authority so provide training, not just to your staff but to clients and their staff too. To be extra secure, offer clients advice on oversight and governance procedures
Get the right insurance protection
To be sure you have the right insurance to cover the risks, work with a specialist, like us.
A holistic package should include:
- Professional indemnity insurance protects against claims from AI errors and hallucinations, but you must ensure your policy doesn’t exclude AI.
- Cyber insurance covers data breaches and system failures and is important to protect regulatory and data risks.
- Directors’ and officers’ insurance (D&O) protects leadership decisions.
Be covered, be confident
AI offers innovation and opportunities, but hallucinations represent a governance and risk management challenge.
As long as you treat AI like any other critical system, implement checks and balances, and get the right insurance cover, you can use it with confidence.
Speak to our team of friendly experts to get the right cover.
