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April 23, 2024

Is Your Company at Risk of AI Washing?

Everyone’s talking about AI. Unfortunately, some companies are talking more than doing, which may lead to allegations of AI washing. Let’s take a look at how getting caught up in the hype may lead to fines and lawsuits.

What Is AI Washing?

Since ChatGPT launched in late 2022, the AI race has heated up considerably. AI companies are competing to come out with the newest and best generative AI tools. Other businesses are focused on leveraging those tools. Amid all the hype, some companies may be getting carried away with their claims, which has led to claims of AI washing.

AI washing refers to deceptive, exaggerated, or false claims about the use of AI in services or products. When companies engage in AI washing, they try to make their services or products seem more sophisticated by overstating (or completely lying about) the role of AI. The intention is often to make the company more desirable to customers or investors who want to see cutting-edge technology.

The Crackdown on AI Washing

The SEC has made it clear that companies engaging in AI washing may face significant fines.

In March 2024, the SEC announced it had charged two investment advisers with making misleading and false statements about their use of AI. The firms have agreed to pay $175,00 and $225,000, respectively, in civil penalties. The SEC says one of the firms issued a press release claiming it leveraged AI and machine learning that incorporated client data in its investment process, whereas the other firm falsely claimed on its website and social media to be the “first regulated AI financial advisor” and said it used “expert AI-driven forecasts.” These claims were determined to be false.

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors,” said SEC Chair Gary Gensler.

Learning from Greenwashing Lawsuits

Similar situations have occurred with greenwashing and ESG claims. In fact, company leaders who are looking at how not to proceed with AI would be wise to consider recent greenwashing and ESG lawsuits.

Truth in Advertising has tracked more than 100 lawsuits involving allegations of greenwashing – or making products and services seem more environmentally friendly than they actually are. The U.S. Department of Justice says Kohl’s and Walmart agreed to pay $2.5 million and $3 million, respectively, in civil penalties to settle allegations. These involved deceptive claims about products supposedly made of environmentally-friendly bamboo, when the products were actually made of rayon. In another case, Dairy News says Oatly, a Swedish oat drink company, agreed to a $9.25 million settlement over allegations of greenwashing. The lawsuit, which occurred after a $1.4 billion IPO, claimed that Oatly exaggerated environmental sustainability claims and engaged in financial misrepresentation.

Companies have also been accused of exaggerating diversity efforts. According to Risk & Insurance, companies have been making ESG and DEI commitments – but if they fail to fulfill those promises, they may face lawsuits. In 2020, Jones Day said it was tracking an uptick in shareholder derivative actions claiming that officers and directors had misrepresented their companies’ commitment to diversity and inclusion, citing a lack of diversity among boards and senior executive teams.

Could Your Company Face Allegations of AI Washing?

Companies that are deliberately deceiving customers and investors about their AI capabilities may rightfully be called out for AI washing. However, even companies that don’t mean to be deceptive may end up facing allegations of AI washing if their actions don’t live up to the hype they create.

For example, a company may make vague but boastful claims about leveraging AI. The company leaders may think these claims are safe because they are vague. However, vague claims may be particularly difficult to substantiate, which may lead to disputes. Likewise, companies may make aspirational claims about AI. The company may want the claims to become true, but investors may feel deceived if this proves impossible.

Does your company have protection against lawsuits alleging AI washing? Heffernan Insurance Brokers can help you review your management liability insurance needs. Learn more.

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