Getting your Trinity Audio player ready...

Author: Joey Sylvester

null

As organizations increasingly adopt artificial intelligence to streamline processes, enhance services and drive innovation, they simultaneously expose themselves to significant reputational risks stemming from artificial intelligence (AI) misuse. It's no wonder the Global Situation Room's Reputation Risk Index recently labeled AI misuse as the number one risk to organizations today.1

Mismanaged or unethical AI applications can severely damage an organization's public image, stakeholder trust and — crucially — its bottom line. Addressing these risks proactively is essential not only to better safeguard reputation but also to help protect against direct and indirect financial harm.

Understanding reputation risk from AI misuse

AI misuse can occur when systems produce biased decisions, compromise privacy, lead to discriminatory outcomes or are deployed without appropriate governance. Common scenarios include:

  • Algorithmic bias leading to unfair or illegal outcomes
  • Privacy violations through improper data handling
  • Opaque decision-making that creates confusion or perceived deception
  • Deployment of unethical or socially irresponsible AI applications

These incident — many of which are tracked in public databases — frequently generate media scrutiny, legal inquiries and public backlash, amplifying reputational damage.2

Reputation risk is financial risk

Reputation damage isn't just a public relations issue — it can lead to financial consequences.3 Consider the following impacts:

Loss of revenue: Customers may switch to competitors perceived as more ethical or safer, resulting in immediate and long-term revenue decline.

Customer acquisition costs rise: As trust erodes, the cost to win new customers can increase, often requiring steep discounts or costly reputation repair campaigns.

Market confidence drops: Publicly traded companies may experience stock price dips following AI-related incidents.

Litigation and regulatory costs: Lawsuits and investigations from AI misuse can lead to fines, settlements and legal fees.

Talent attrition: Top talent and business partners may distance themselves, compounding operational challenges.

These potential financial outcomes demonstrate why reputation risk from AI misuse should be treated as a core enterprise risk.

Mitigating reputation risk through responsible AI governance

Proactive AI governance is essential to help mitigate these risks. Key strategies include:

Ethical frameworks: Define and enforce principles that align with business objectives, legal obligations and societal expectations.

Transparency and accountability: Provide clear, accessible explanations for AI-driven decisions. Disclose system limitations.

Robust impact assessments: Conduct and document AI impact assessments that evaluate risks to both individuals and organizational resilience.

Continuous oversight and monitoring: Use internal governance structures to maintain visibility and accountability throughout the AI lifecycle.

Stakeholder engagement: Proactively communicate with customers, regulators and partners to maintain trust and gather input.

Incident response planning: Executing a formal and practiced AI incident response plan can help organizations navigate this complex risk.

Insurance considerations

While Cyber insurance policies often offer coverage for reputational harm stemming from cyber incidents, depending on the nature of an incident, Cyber policies may not extend coverage for reputation loss stemming from AI misuse. Insurers are still evolving their models to assess AI-specific exposures, so there may be a gap in coverage in traditional cyber policies. In addition, it may be prudent to review other insurance policies that may provide some coverage for AI-driven losses.

Organizations deploying AI should:

  • Assess the risks associated with the specific use cases.
  • Review current insurance policies to determine if AI-related incidents are explicitly covered. Specialized AI insurance policies may be needed depending on possible coverage gaps.
  • Engage with broker and carrier partners to understand how AI governance practices can influence underwriting decisions.
  • Build AI governance into enterprise risk management programs to enhance overall governance and risk management.

Conclusion

Reputation risk from AI misuse carries real and significant financial consequences. It may affect revenue, customer trust, legal exposure and long-term market positioning. By embedding robust AI governance practices, including ethical frameworks, impact assessments and transparency initiatives, organizations not only can protect individual rights but also can better shield themselves from financial fallout. Proactively addressing this new risk profile is no longer optional — it's a strategic imperative.

Author Information

Sources

1"Reputation Risk Index," Global Situation Room, 15 Apr 2025.

2"Welcome to the Artificial Intelligence Incident Database," AI Incident Database, accessed 16 Jun 2025.

3Eccles, Robert G et al. "Reputation and Its Risks," Harvard Business Review, Feb 2007.

Disclaimer

Gallagher provides insurance, risk management and consultation services for our clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance/risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general informational purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers control.

Gallagher publications may contain links to non-Gallagher websites that are created and controlled by other organizations. We claim no responsibility for the content of any linked website, or any link contained therein. The inclusion of any link does not imply endorsement by Gallagher, as we have no responsibility for information referenced in material owned and controlled by other parties. Gallagher strongly encourages you to review any separate terms of use and privacy policies governing use of these third-party websites and resources.