May 2026 · 5 min read
On March 18, 2024, the SEC fined two investment advisors $400,000 in the first AI washing settlements ever brought. The allegations were straightforward: the firms claimed to use AI in their business when they weren't, or not to the degree they advertised. The penalty wasn't huge. The precedent is the point.
SEC Chair Gary Gensler had warned the move was coming. In a speech at Yale Law School, he said the SEC "will make war without quarter" against companies that aren't truthful about their AI use. He called it "AI washing," deliberately echoing the greenwashing enforcement playbook.
About 40% of S&P 500 companies mention AI in their most recent annual reports. The companies that talked about AI on Q4 2023 earnings calls saw better average stock performance than those that didn't. That creates pressure to keep mentioning AI. Which creates exposure if the mention isn't quite accurate. Which is where directors and officers get sued.
Aon's Financial Services Group recently mapped the D&O exposure across connected risk areas that all show up at renewal. None of them are theoretical anymore.
The securities class action is the most visible pressure point. In February 2024, before the SEC settlements, a public company saw its stock drop 30% after allegedly making false statements about its AI capabilities. The shareholder lawsuit followed within days. As Aon's D&O Product Leader Adam Furmansky puts it: "Many of these incidents involve firms touting AI capabilities. Later, it's allegedly revealed that the AI is not as developed as articulated."
Regulatory enforcement is growing fastest. The EU AI Act is being phased in. The Colorado AI Act, effective February 2026, is the first comprehensive US state law targeting high-risk AI systems. Boards aren't typically fined directly under these regimes. They get sued by shareholders when the company is.
The shareholder derivative claim is the one most boards underestimate. Aon flags recent Delaware case law that now holds officers, not just directors, personally liable for failing their AI oversight duties. That's a meaningful shift. A breach of fiduciary duty claim around AI governance now reaches the management team personally.
Standard D&O policy definitions were written before AI was a board-level concern. The definition of "Loss" doesn't always pick up regulatory penalties from AI-specific laws. The definition of "Insured Person" may not cover the AI governance committees being formed at portfolio companies. And standard exclusions can trigger in ways no one anticipated when the policy was written.
Aon's specific recommendation: audit your D&O regularly and augment the key definitions. "Loss" and "Insured Person" are the two to focus on. Exclusionary language needs carve-backs for AI-related exposures. None of that happens automatically at renewal. It happens if you ask, with specific language, and you have a broker who knows what to ask for.
Derivative settlements are often non-indemnifiable, which means the company can't legally reimburse directors and officers for personal payouts. Aon flags Side A D&O coverage as critical for exactly this reason. Without it, individual directors and officers may have to write personal checks to settle derivative claims. The amounts can run into the hundreds of millions of dollars.
If your current D&O doesn't include adequate Side A limits, and your business uses AI in any meaningful capacity, you have a structural gap. Not a hypothetical one.
You don't need to read Aon's full reports to act on this. You need to put one question in writing to your broker at your next D&O renewal: does this policy respond to AI washing claims, with the right definitions of "Loss" and "Insured Person," and adequate Side A limits for derivative settlements arising from AI oversight failures?
If the answer comes back hedged, you don't have AI D&O coverage. You have D&O coverage with a question mark.
Sources: Aon Financial Services Group, "The Growing Use of Artificial Intelligence: D&O Risks and Potential Coverage Solutions" (April 2024) and "Directors and Officers Guide to Navigating AI-Related Risks." Both available on Aon.com.
Sal Martorano is the founder of The AI Insurance Group, a licensed independent insurance agency in New Jersey, Pennsylvania and Florida. NJ Producer License No. 3004245927.