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AI Insurance Implications for Small Businesses

By Gallagher Small Business | Thursday, June 25, 2026

Businesses are increasingly using AI tools to support their operations. Be it e-commerce agencies or construction companies, AI is being used in generating content, automating customer interactions, improving operational efficiency and analyzing data. However, adopting responsible AI protocols and AI insurance are essential to managing emerging risks and ensuring long-term protection.

According to Gallagher's 2026 AI Adoption and Risk Survey: AI in Action, in the past 12 months, the rollout of AI adoption strategies has accelerated, with a much greater proportion of businesses (63%) now having either fully operationalized or implemented AI within parts of their business.

Using AI, businesses are aiming to reduce their administrative burden, lower costs and enhance productivity.

At the same time, they're also coming to a new understanding of its risks. Existing insurance, such as cyber or general liability policies, may cover some of these, but also may not. Understanding the difference, as well as the resulting potential gaps in AI liability coverage, is crucial.

AI insurance: The need for new types of coverage

AI tools are transforming day-to-day business functions beyond the scope of drafting emails and marketing materials or supporting HR processes.

These systems are generating outputs and making recommendations for the business. If allowed, these tools can also operate with a degree of autonomy, introducing a new risk dynamic that businesses should recognize and prepare for.

AI can also pose new cyber threats. According to a recent report, 81% of small businesses in the US suffered a security or data breach in 2025. Of those incidents, 41% involved AI-powered attacks.1

Entrepreneurs and business managers alike need to understand the risks of AI to make the most of its advantages.

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Key AI risk exposures for small businesses

Inaccurate outputs

AI-generated content may appear credible but can be incorrect. This happens because AI tools "hallucinate," wherein AI models present wrong information confidently, because the tool prioritizes pattern matching over factual accuracy. In such a scenario, inaccurate information can mislead customers and expose the business to lawsuits.

Bias and discrimination

AI models have been trained on certain datasets that can reflect biases. Biased outcomes in areas such as hiring or customer engagement are risky and could lead to regulatory scrutiny or legal claims.

Categories

Case study: Firm sued for AI hiring bias

In August 2023, a tutoring firm settled an Equal Employment Opportunity Commission (EEOC) lawsuit for using AI hiring tools to reject female applicants aged 55+ and male applicants aged 60+, in violation of the Age Discrimination in Employment Act (ADEA). Over 200 US applicants were impacted. The company agreed to implement policy changes and training following the lawsuit.

Data privacy and security

Many AI tools require customer data to operate as intended, increasing the risk of improper handling of sensitive information. Any mishandling can lead to data breaches or non-compliance with local laws.

Infringement of intellectual property

Small businesses using AI-generated data might unknowingly present content as their own, which could inadvertently infringe on existing intellectual property rights.

How can small businesses use AI more responsibly?

Gallagher's 2026 AI Adoption and Risk survey revealed that more than half of business leaders are worried about AI errors, misinformation and hallucinations more than legal risks and privacy issues.

Here are some practical steps business owners can take to reduce their AI risk exposure:

  • Identify all AI tools that are in use across the business, including informal or employee-led use.
  • Establish clear internal guidelines for AI usage, such as restricting employees from entering sensitive or confidential data into AI systems and defining areas where AI shouldn't be used.
  • Implement a human review process that helps identify errors before they impact the business negatively.
  • Ensure that the data being shared with AI platforms aligns with privacy and compliance expectations. Understanding how third-party tools use and store data is essential.

Periodically review tools and processes to stay updated on evolving risks and set up practices to mitigate them as AI adoption grows.

AI is incredibly thorough and can quickly identify small discrepancies in policies that we might have missed otherwise. But the industry is so deeply relationship driven that AI simply can't replace us. A human component will always be needed.

Madison Boyk, Area Vice President, Multinational benefits & mobility consulting, Gallagher

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What types of insurance solutions do businesses need to protect against AI claims?

The majority of small businesses have core insurance coverages, including general liability, professional liability and cyber insurance.

With AI adoption now expanding faster than ever, new risks may not be fully addressed by existing policies. These include:

  • Cyber policies that typically respond when AI is used in cyberattacks, such as AI-powered phishing emails or deepfake scams. However, it typically doesn't cover harm caused by AI inaccuracies, defamation or copyright issues.
  • General liability policies, which may respond if AI contributes to bodily injury or property damage, but not otherwise. Financial loss, reputational harm, discrimination claims or incorrect advice often fall outside its scope.
  • Professional liability (E&O) policies, which are designed to cover errors in professional services, but weren't built specifically to cover AI-related claims. Coverage depends heavily on how the policy is written and how the AI is used.

When existing policies have AI coverage gaps, specialist AI insurance coverage may be available. Several organizations have begun offering policies that cover AI-related risks in recent years, and Gallagher is at the forefront of exploring such solutions for its clients. Check out our recent white paper on this topic for more information.

Here is a list of the types of coverage and add-ons that address different AI risks offered to small businesses at Gallagher:

  • Cyber Liability Insurance
  • Errors and Omissions (E&O) Insurance
  • Technology Errors and Omissions Insurance
  • Intellectual Property (IP) Insurance
  • Product Liability Insurance
  • Privacy Liability Insurance
  • Employment Practices Liability Insurance (EPLI)
  • Business Interruption Insurance
  • Media Liability Insurance
  • Regulatory Liability Insurance
  • Data Breach Response Coverage
  • Third-Party Liability Coverage
  • AI-Specific Risk Consulting
  • Customizable Riders

As your business and your teams' use of AI evolve, the first step is to implement internal controls for its use, and the next is to understand how your current insurance coverage addresses AI-related risks.

If you'd like to find out if you have any AI insurance coverage gaps, reach out to one of our Small Business Insurance Advisors today. Our insurance experts can make coverage recommendations to help your business stay protected should an AI risk arise.

Sources

1 "2025 Business Impact Report," Identity Theft Resource Center, accessed 11 Jun 2026. PDF File.