Artificial intelligence (AI) is fundamentally shaping how businesses operate. This is presenting opportunities for corporates, and their shareholders, who adopt AI solutions to deliver profit.
However, we are now seeing companies exaggerating their AI capabilities to induce stakeholders to make investments. This concept, known as "AI washing", is becoming increasingly concerning for D&O insurers.
The technology sector is ripe for such claims as corporates seek to highlight their AI capabilities to secure outside investment to scale their businesses. However, if a company falsely makes statements about its AI capabilities then it, along with its officeholders, can be held liable.
It has long been the case that many D&O insurance policies will provide cover for claims arising out of alleged misleading statements made by officeholders to shareholders about the company's performance or future growth.
This is very much a developing area in the US where we are seeing the Securities and Exchange Commission (SEC) increasingly clamp down on corporates who make misleading statements about their AI capabilities.
AI washing in the US
One such recent case in the US illustrates the growing exposure that D&O insurers face as a result of AI washing. The case concerned Mr Saniger, the founder of US e-commerce company 'Nate Inc.'
Nate Inc. claimed to operate an e-commerce system utilising AI to process payments on a 'fully automated' and 'scalable' basis. Nate Inc. essentially represented that it could simplifying online shopping by allowing payments to be made efficiently across a number of websites.
In reality the payments were processed by offshore contractors manually inputting orders and latterly by less sophisticated online 'bots'. Nate Inc. did not utilise the proprietary AI technologies it presented itself as operating with.
As a result of these representations, Nate Inc. was able to raise around USD 42m in investments between 2019 and 2022.
In April 2025, Mr Saniger was charged by the U.S. Attorney for the Southern District of New York and the SEC amid allegations of securities fraud. The allegations are that Mr Saniger falsely represented the AI capabilities of Nate Inc. to secure investments from shareholders.
These allegations are a classic case of AI washing - where the allure of AI, and quick profits for shareholders, are used to mislead investors into making investments.
Financial Services and Markets Act 2010 ("FSMA") – the prospect of Securities Claims in the AI Space
Whilst the market in terms of claims by shareholders is definitely more mature in the US than in England and Wales, we continue to see a growth in shareholder claims filed in this jurisdiction arising from alleged misleading statements made to shareholders.
In England, shareholder claims are typically brought under the FSMA. Section 90 of FSMA provides a right of action for shareholders of UK listed companies to sue the company if they suffer loss arising out of untrue or misleading statements in listing particulars or prospectuses made by the company. It is not necessary for the shareholders to have "relied" on the misstatements.
Claims may also be brought by shareholders under Section 90A (or Schedule 10A) of FSMA if the shareholder suffered loss due to a misleading statement or omission in documentation and it can be established that a "person discharging managerial responsibilities" (a PDMR) within the issuing company knew of the misleading/untrue statement or knew the omission to be dishonest and the shareholder "acquires, continues to hold or disposes of" its securities in reliance on the information in the publication.
The definition of "wrongful acts" in the D&O policy will typically cover alleged misstatements, omissions and breaches of duty and therefore Section 90 and 90A claims will typically engage a D&O policy and, subject to a detailed review of coverage, defence costs may need to be advanced. Our experience of dealing with these claims is that the costs of defending a shareholder action can be significant.
Aside from the risk of civil claims, officeholders are also potentially exposed to regulatory actions arising from communications to the market that are inaccurate.
AI – a huge risk or a huge opportunity?
Given the evolving landscape around AI, the prospect of AI washing represents a developing risk to directors of companies and their insurers.
AI risks are being actively considered in the context of D&O policy wordings and questions regarding AI and AI governance are likely to form a key part of the underwriting process going forward.
In an environment where statements made by officeholders are increasingly scrutinised, it remains to be seen whether the growing trend of AI washing claims will "wash over" the Atlantic from the US to England and Wales.
