AI hallucination puts firms at risk? New insurance covers legal costs

Insurers at Lloyd's of London have introduced a new insurance product designed to protect businesses from financial losses arising from artificial intelligence system failures, according to a report by The Financial Times. The insurance, developed by Y Combinator-backed start-up Armilla, provides coverage for legal claims against companies when AI tools generate inaccurate outputs.
The policy offers financial protection against potential legal consequences, including court-awarded damages and associated legal expenses. It responds to rising concerns over AI's tendency to produce unreliable or misleading information—commonly referred to as "hallucinations" in AI terminology.
As companies increasingly integrate AI tools to enhance efficiency, they also face growing risks from errors caused by flaws in AI models that lead to hallucinations or fabricated information. Last year, a tribunal ruled that Air Canada must honour a discount its customer service chatbot had wrongly offered.
What is an AI hallucination?
An AI hallucination occurs when an algorithm generates information that appears credible but is actually false or misleading. Computer scientists use the term to describe such errors, which have been seen in various AI tools.
These hallucinations can cause significant problems when AI is used in sensitive areas. While some errors are relatively harmless—such as a chatbot giving a wrong answer—others can have serious consequences. In high-stakes settings like legal cases or health insurance decisions, inaccuracies can severely impact people's lives.
Unlike systems that follow strict, human-defined rules, AI models operate based on statistical patterns and probabilities, which makes occasional errors inevitable. Though minor mistakes may not pose a big problem for most users, hallucinations become critical when dealing with legal, medical, or confidential business matters.
Karthik Ramakrishnan, Armilla's chief executive, said the new product could encourage more companies to adopt AI by addressing fears that tools like chatbots might break down or make errors.
Hallucinations getting worse despite AI advances
Despite improvements by companies like OpenAI and Google in reducing hallucination rates, the problem has worsened with the introduction of newer reasoning models. OpenAI's internal assessments found that its latest models hallucinate more often than earlier versions.
Specifically, OpenAI reported that its most advanced model, o3, produced hallucinations 33 per cent of the time on the PersonQA benchmark, which tests the ability to answer questions about public figures—more than double the rate of its earlier model, o1.

Try Our AI Features

Explore what Daily8 AI can do for you:

Learn with AIFact CheckingText to SpeechAI Summary

Related Articles

Economic Times

35 minutes ago

• Economic Times

Former Meta VP Karandeep Anand takes on CEO role at Character. ai

Live Events Google-backed AI chatbot service Character. ai has appointed Karandeep Anand as its next chief executive officer on to this, he was vice president and head of business products at Meta . He has also held executive roles at the new role, Anand will focus on advancing Character. ai's long term strategy to enhance multimodal-AI technology and expand the user has been a board advisor to Character. ai for the last nine months. In a note, he laid out plans for the company over the next 60 days. These plans include working on refining open source models in an attempt to improve memory and overall model quality. He also aims to improve search and discoverability features to help users navigate parallel, Anand hinted at expanding Character. ai's creative toolkit to help creators design richer, immersive characters, with audio and video give users better control, he said he is going to make the content filters less overbearing to ease out restrictions. Additionally, he aims to roll out 'Archive' option to allow users to hide or archive characters if they wish company also announced Dominic Perella as chief legal officer and senior vice president (SVP) of global ai uses deep learning models similar to GPT-type models, offering conversational AI characters while also allowing character creation. However, it does not support generating images or code, making it a solely text-based model.

Time of India

3 hours ago

• Time of India

Former Meta VP Karandeep Anand takes on CEO role at Character. ai

Google-backed AI chatbot service Character. ai has appointed Karandeep Anand as its next chief executive officer on Friday. Prior to this, he was vice president and head of business products at Meta . He has also held executive roles at Microsoft. In the new role, Anand will focus on advancing Character. ai's long term strategy to enhance multimodal-AI technology and expand the user base. Anand has been a board advisor to Character. ai for the last nine months. In a note, he laid out plans for the company over the next 60 days. These plans include working on refining open source models in an attempt to improve memory and overall model quality. He also aims to improve search and discoverability features to help users navigate better. In parallel, Anand hinted at expanding Character. ai's creative toolkit to help creators design richer, immersive characters, with audio and video capabilities. Live Events To give users better control, he said he is going to make the content filters less overbearing to ease out restrictions. Additionally, he aims to roll out 'Archive' option to allow users to hide or archive characters if they wish to. Discover the stories of your interest Blockchain 5 Stories Cyber-safety 7 Stories Fintech 9 Stories E-comm 9 Stories ML 8 Stories Edtech 6 Stories The company also announced Dominic Perella as chief legal officer and senior vice president (SVP) of global affairs. Character. ai uses deep learning models similar to GPT-type models, offering conversational AI characters while also allowing character creation. However, it does not support generating images or code, making it a solely text-based model.

Mint

6 hours ago

• Mint

AI meets adult content: THIS platform is a ‘lovechild between OnlyFans and OpenAI'

Ever since OpenAI introduced the general world to the many possibilities of artificial intelligence (AI), developers have been experimenting with ways the technology can change the overall user experience. In one such experiment, a start-up with over 2,00,000 users in the United States, brought together the endlessness of AI and fame, and merged it with the "spicy fantasies" of OnlyFans users. OhChat, a platform its creator described as the 'lovechild between OnlyFans and OpenAI,' uses artificial intelligence to build lifelike digital duplicates of public figures. These AI avatars of adult content celebrities don't eat, sleep or breathe, but 'remember you, desire you and never log off'. In an interview with CNN, OhChat CEO Nic Young said goes a step further than platforms such as OnlyFans, where users pay to gain access to adult content from content creators. Once activated, the avatars run autonomously, offering 'infinite personalised content' for subscribers. OhChat 'is an incredibly powerful tool, and tools can be used however the human behind it wants to be used,' he said. 'We could use this in a really scary way, but we're using it in a really, I think, good, exciting way.' Young told CNN that OhChat works on a tiered subscription model wherein a user pays $4.99 ( ₹ 430) per month for unlimited texts on demand, $9.99 ( ₹ 865) for capped access to voice notes and images, or $29.99 ( ₹ 2,600) for unlimited VIP interaction. According to Young, platform creators receive an 80 per cent cut from the revenue their AI avatar generates. OhChat keeps the remaining 20 per cent. 'You have literally unlimited passive income without having to do anything again,' Young told CNN. Since launching OhChat in October 2024, the company has signed 20 creators, including 'Baywatch' actress Carmen Electra, and former British glamour model Katie Price – Jordan. Some of the creators are already earning thousands of dollars per month, Young said. Nic Young said that to build a digital twin, OhChat asks its creators to submit 30 images of themselves and speak to a bot for 30 minutes. The platform can then generate the digital replica 'within hours' using Meta's large language model. For example, the AI avatar of Jordan is trained to mimic her voice, appearance and mannerisms. She can 'sext' users, send voice notes and images, and provide on-demand intimacy at scale – all without her lifting a finger. The platform was categorised with their AI avatars on an internal scale to rank the intensity and explicitness of their interactions. Creators contributing to the platform decide which level their avatar will be.