AI companies use investor funds as insurers refuse risky coverage

OpenAI and Anthropic are turning to investor funds to settle AI-related lawsuits after traditional insurers refuse to fully cover the scale of potential damages these companies face. The insurance gap reveals how traditional risk models are struggling to adapt to the unprecedented liability exposure of AI companies, potentially forcing them to self-insure against billion-dollar copyright and safety claims.

The big picture: Major AI companies are discovering that conventional insurance coverage falls dramatically short of their potential legal exposure, forcing them to rely on venture capital to cover massive settlements.

Key details: OpenAI faces multiple high-stakes lawsuits that could result in billions in damages, while its insurance coverage appears inadequate for the scale of risk.

• The company has secured some coverage from Aon, a major insurance firm, with reports suggesting up to $300 million could be insured — a fraction of potential payouts.
• OpenAI is defending against copyright infringement lawsuits from authors and The New York Times over its use of copyrighted material to train ChatGPT.
• The company also faces a lawsuit from the family of a teenager who died by suicide after allegedly using ChatGPT.
• OpenAI has raised $60 billion from investors, providing a substantial fund to draw from for settlements.

Who else is involved: Anthropic is taking a similar approach, with a California judge preliminarily approving a $1.5 billion settlement with authors.

• The settlement will be funded partly from Anthropic’s own resources, according to the Financial Times.
• Anthropic has raised $32 billion to date, giving it significant capital reserves for legal expenses.

Why this matters: The insurance industry’s inability to price AI risks echoes earlier struggles with cyber threats in the 2010s, when lack of historical data led to massive losses for insurers.

• Insurance companies eventually adapted to cyber risks by raising premiums, narrowing coverage, and developing data-driven risk models.
• While AI damages could potentially be even higher than cyber losses, the cyber insurance evolution provides a roadmap for how the industry might adapt.
• The current gap forces AI companies to essentially self-insure through investor capital, creating a new dynamic in how these companies manage risk.

The bottom line: Traditional insurance models are proving inadequate for the AI industry’s unique risk profile, pushing companies to rely on venture funding as a form of self-insurance while the industry develops new approaches to coverage.