Specialty re/insurer Chaucer has introduced a third-party liability insurance product designed to address operational and legal risks associated with enterprise AI systems, including hallucinations, model drift, and mechanical failures.
Developed in collaboration with Armilla AI, the offering is available to US-based insureds operating globally and provides legal defense and liability protection for claims arising from AI system underperformance or failure.
The launch reflects a growing recognition within the insurance market that AI-related risks are moving beyond experimental deployments into business-critical environments. As organizations embed large language models and other AI systems into customer-facing workflows, decisioning engines, and operational platforms, exposure to third-party claims — including errors, misinformation, or performance degradation — becomes a board-level consideration.
The new liability cover builds on an earlier warranty-style product co-developed by Chaucer and Armilla. According to the companies, demand from AI adopters has shifted toward broader third-party liability protection. Their collaboration originated within Lloyd’s Lab, where Chaucer supported Armilla’s development and sponsored its Lloyd’s coverholder application.
Tom Graham, head of partnership and innovation at Chaucer, said: “At Chaucer, we believe that AI is reshaping the risk landscape — and that requires fresh thinking from the insurance market. Our partnership with Armilla AI has enabled us to co-develop a product that not only recognizes the complexities of AI underperformance but provides meaningful coverage that supports innovation, transparency and accountability. This launch marks a pivotal step in how we insure the technologies of tomorrow.”
Karthik Ramakrishnan, CEO of Armilla AI, added: “Partnering with Chaucer marks a major milestone in our mission to make AI safer for everyone. Our new AI liability coverage empowers organizations to adopt cutting-edge technology; while knowing they’re protected against the unique risks AI can bring. At Armilla, we’ve pioneered advanced methodologies to identify and mitigate AI-related vulnerabilities — from early development to deployment at scale. We’re putting these insights into action through robust insurance coverage, enabling organizations to adopt AI responsibly and confidently push the boundaries of innovation.”
For enterprise, the development signals a maturing risk-transfer market around AI. As regulatory scrutiny increases and contractual liability frameworks evolve, insurance solutions tailored to AI-specific failure modes — such as hallucination-driven misinformation or performance drift over time — are likely to become part of broader governance, risk, and compliance strategies.