Lloyd’s insurers offer new coverage for AI hallucination damages

A group of Lloyd’s of London insurers has launched a specialized insurance product to cover companies against losses caused by malfunctioning AI tools. As reported by Lee Harris and Melissa Heikkilä in the Financial Times, the policies developed by Y Combinator-backed startup Armilla will pay for damages and legal fees if companies face lawsuits due to AI errors. The insurance specifically covers situations where AI systems like chatbots perform below expected standards. Karthik Ramakrishnan, Armilla’s CEO, explained that the policy would compensate clients if AI models degrade in performance over time. The product aims to address growing concerns about AI hallucinations, which have already caused problems for companies like Air Canada, which was ordered to honor discounts incorrectly generated by its chatbot, and Virgin Money, whose AI bot inappropriately reprimanded customers.