The number of securities class actions accusing companies of misrepresenting their profitability from artificial intelligence applications, also known as “AI washing,” more than doubled in 2024, and the pace is unlikely to slow this year, experts say.

A January report from Cornerstone Research showed there were 15 securities class actions involving AI-related allegations filed in federal courts in 2024 compared with seven in 2023. The economic and financial consultancy said 41 such class actions have been filed in federal courts since March 2020.

AI washing securities class actions were recently filed in federal courts in California against Palo Alto, California-based mobile tech company AppLovin Corp. and Irvine, California-based semiconductor maker SkyWorks Solutions Inc. The lawsuits allege the companies violated various sections of the U.S. Securities and Exchange Act by overestimating how their use of AI would improve their financial performance.

The proliferation of AI washing securities class actions is expected due to the uncertainty around how AI will ultimately function and impact a company’s profitability, experts say.

The current trend of AI washing securities class actions is reminiscent of “greenwashing” lawsuits in the 1980s when companies allegedly overstated their products’ eco-friendliness or environmental practices, said Lee S. Siegel, a Hartford, Connecticut-based insurance coverage partner at Hurwitz Fine PC.

“We had a lot of history with greenwashing securities litigation, and we’re seeing this play out in the AI area in pretty much the same way,” he said.

Those similarities pose challenges to directors and officers liability underwriters, experts say.

Underwriting the risks posed by a company’s use of AI is challenging from an operational, governance and disclosure perspective and in developing risk criteria, similar to representations and disclosures made about environmental, social and governance initiatives, said Mark Butler, New York-based senior vice president and head of underwriting at AmTrust Exec, a unit of AmTrust Financial Services Inc.

A company with “all of its eggs in the AI basket” and entirely dependent on the technology — or public perception of the technology — for its profits and stock price performance is most vulnerable to an AI washing lawsuit, said Nick Reider, San Francisco-based deputy D&O product leader-West for Aon PLC’s financial services group.

“There’s this tension for companies to please shareholders by incorporating AI into their business model, increase profits and, at the same time, ensure that disclosures about the technology are not overselling its capabilities,” said Lilit Asadourian, a Los Angeles-based insurance recovery partner at Barnes & Thornburg LLP.

The potential growth of AI washing class actions depends on the state of the stock market, which has seen significant volatility in the past several months, Mr. Siegel said.

“As a company’s stock price falls, securities class-action lawyers are going to examine all public disclosures and representations about a company to find a basis to bring a securities class-action lawsuit. We’ll probably see heightened scrutiny about a company’s AI representations and an attempt by the securities class-actions bar to link any stock price drops to AI overpromises,” he said.

The 15 AI washing securities class actions filed in 2024 is unlikely to be the high-water mark, experts say, and there is potential for other lawsuits resulting from the technology.

“The number will probably increase before it stabilizes, and stability is probably going to come from getting a better grasp around AI facilitating business, businesses learning that they’re going to have to take a hard look at AI capabilities and be more measured about their disclosures about their reliance on AI and expectations for business growth,” Ms. Asadourian said.

Lawsuits resulting from AI not working as intended are likely to be more challenging and have a more significant impact on the D&O market, said Washington-based Ruth Kochenderfer, D&O product leader for the U.S. and Canada at Marsh LLC.

“We expect to see more cases where AI is at the core of lawsuits because of how it is permeating almost every aspect of business. We’re going to see a wide range of cases,” she said.

One potentially sizeable exposure related to AI will be derivative lawsuits, or those brought by shareholders on behalf of the company against individual directors and officers, Mr. Reider said.

“We’ve already seen discrimination lawsuits concerning how AI is used during the hiring process. It’s only a matter of time before shareholders wise up and try to pin bad things on the directors and officers of public or private companies,” he said.

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Class actions prompt insurers to examine emerging AI liabilities

Insurers are starting to take notice of the risks the use of artificial intelligence poses to the directors and officers liability market as the rise in related securities class actions makes the potential exposure more apparent, experts say.

Insurers are currently in the “information gathering” stage of addressing the risks associated with AI, as they examine lawsuits containing allegations about its use and impact on profitability.

“We’re seeing carriers ask a lot more questions, including more targeted questions about disclosures with respect to AI and about board oversight of AI,” said Ruth Kochenderfer, Washington-based D&O product leader for the U.S. and Canada at Marsh LLC.

While insurers haven’t added exclusionary language in their D&O policies regarding AI washing, they may consider inserting sublimits involving those exposures “to contain what they see as a risk for a growing area of litigation,” said Hartford, Connecticut-based Lee S. Siegel, an insurance coverage partner at Hurwitz Fine PC.

Publicly traded companies specializing in AI should embrace transparency about their use of the technology and its effect on profitability.

“The truth will set you free, particularly if you are a public company with Securities Exchange Act of 1934 liability,” said Nick Reider, San Francisco-based deputy D&O product leader-West for Aon PLC’s financial services group.

Companies are also creating cross-functional teams “to make sure the right hand is talking with the left hand to avoid pitfalls,” he said.