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AI-driven chatbots have become the latest focus of privacy litigation, with federal and state eavesdropping and wiretapping regulations being reinterpreted. Unlike traditional cookies or session replay, the legal debate centers on whether chatbots are considered “participants in the conversation” or “third-party eavesdroppers.” Some early lawsuits have made progress at the dismissal stage, indicating that such claims may grow rapidly, imposing high litigation and compliance costs on businesses. Meanwhile, there is significant uncertainty regarding insurance coverage, as general liability and cyber insurance often include exclusions for “statutory privacy violations,” and the implicit risks associated with AI give insurers more grounds to deny claims. Unless exclusion clauses clearly specify regulations, businesses may still find themselves in prolonged disputes with insurers. To mitigate risks, companies need to strengthen user consent mechanisms for chatbots, strictly manage contract terms with third-party vendors, and comprehensively review insurance coverage. As regulations and case law become clearer, insurance claims consultants will play a crucial role in interpreting ambiguous clauses, advocating for AI-related coverage, and handling potential insurance disputes.
AI-driven chatbots have raised profound concerns regarding federal and state eavesdropping and wiretapping regulations, with recent lawsuits testing these regulations, increasing risks for companies and developers using this technology. Security experts integrating AI chatbots into their businesses face uncertainty about whether insurance will cover privacy-related claims arising from these technologies.
In an interview, Stephanie Gee, an insurance claims consultant at Reed Smith, discussed the developments surrounding privacy claims related to AI chatbots, as well as common insurance coverage issues and solutions that security professionals encounter when seeking to mitigate these risks.
Recent lawsuits have begun to examine how eavesdropping and wiretapping regulations apply to AI chatbots, what legal significance these cases hold, and how they differ from earlier privacy lawsuits involving analytical tools or cookies.
Compared to lawsuits involving session replay or cookies, courts exhibit subtle differences in their views on privacy claims arising from the use of AI chatbots. Both types of claims involve allegations of third parties intercepting communications without proper consent, typically based on state eavesdropping laws, but the legal arguments and defenses differ due to the nature of the data collected. For instance, session replay technology can record and physically reproduce user interactions on websites or applications (such as clicks, scrolling, and keystrokes).
A focal issue in the lawsuits is whether recording such physical interactions constitutes a record of the content of communications under relevant regulations. In contrast, AI chatbots can collect or record substantive conversations with users. At this point, the key question becomes whether the AI chatbot is a party to the conversation, thus unable to “intercept” communications.
While businesses can typically present well-founded defenses against these claims (including user consent to such interactions), early successes at the dismissal stage in privacy lawsuits related to AI chatbots make these claims significant, as they increase the likelihood of plaintiffs filing similar lawsuits, which could impose costs and expenses on businesses, including responding to any complaints and participating in the discovery process sought by plaintiffs before dismissal motions.
General liability and cybersecurity insurance policies typically exclude or narrowly define coverage for “statutory privacy violations.” How do these exclusion clauses operate in the context of lawsuits involving AI-driven chatbots?
The impact of exclusion clauses on insurance coverage ultimately depends on the specific wording of the clauses and the allegations made in the underlying lawsuits. For example, exclusion clauses with broad language that include “blanket” phrases (excluding coverage for any statutory violations) may be more difficult for policyholders to overcome than clauses that explicitly name specific regulations.
As these claims are relatively new, we have not yet seen significant cases where such clauses have played a role in insurance coverage litigation. However, in insurance coverage litigation involving allegations of violations of the Biometric Information Privacy Act (BIPA), we have seen similar coverage disputes. In some cases, courts have refused to apply statutory exclusion clauses because BIPA was not explicitly mentioned. Additionally, the underlying lawsuits may contain other causes of action (such as negligence) that involve conduct unrelated to statutory violations, which may implicate coverage regardless of the existence of statutory exclusion clauses.
If a company faces a privacy class action lawsuit due to its chatbot’s use of user data, what are the most common insurance coverage pitfalls when policyholders seek defense or indemnity from their insurers?
In addition to the specific statutory exclusion clauses mentioned above, one pitfall policyholders face is the general uncertainty regarding whether insurance covers AI risks. Typically, policyholders rely on the “implicit” coverage for general claims related to AI, meaning that the policy does not explicitly cover or exclude AI risks. Implicit coverage can lead to ambiguity and provide grounds for insurers to deny claims, arguing that these “novel” risks were never intended to be covered. Disputes with insurers over such “implicit coverage” can be both lengthy and costly.
What practical steps can businesses take in their policy reviews, vendor contracts, or chatbot configurations to minimize legal and insurance coverage risks?
To help mitigate risks, businesses should review their user consent mechanisms for AI chatbot communications. Consent does not always mean signing a form; it can include prominently displaying chatbot privacy notices before collecting any data, providing easily accessible business privacy policies detailing how chatbot interactions are stored, and using automatic disclaimers at the start of each chat session. Businesses should consider that state laws may set different standards for acceptable notice and consent.
Businesses should also carefully review and consider the contract terms with any third-party AI tool providers. For example, if the AI tool provider is not allowed to use the received data for its own benefit, the business may be more likely to successfully argue that the AI chatbot is an extension of the business (rather than a third-party eavesdropper).
As regulators and courts clarify the legal boundaries of data collection by chatbots, what role do you think insurance claims consultants will play in helping clients bridge the gap between insurance policy language and technology?
Even before any lawsuits are filed, insurance claims consultants can assist businesses by evaluating their current insurance plans and advising whether they provide adequate coverage for emerging AI risks. This can include reviewing all exclusions related to statutory violations, eavesdropping, wiretapping, or intentional acts in the insurance coverage and narrowing the scope of exclusions as much as possible. Insurance claims consultants can also identify potential areas where insurers may be willing to negotiate endorsements that explicitly cover AI-related communications.
Once a lawsuit is filed, insurance claims consultants can help policyholders determine which insurers to notify and assist them in meeting notification requirements (which may vary by coverage). Insurance claims consultants can also help policyholders assess the best ways to obtain coverage and communicate with insurers or respond to requests for information from insurers to resolve potential coverage disputes without resorting to litigation.
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