Implications of Improper Use of AI

 Lindsey Wrubel, HOA Attorney

Many of your governing documents require that your Association hold directors and officers liability coverage

(also known as D & O coverage). We recommend that this directors and officers liability coverage cover at least $1 million per occurrence, and that there be an additional policy to protect the general welfare of the association in the form of an umbrella policy. Even if your Association’s governing documents do not require directors and officers liability coverage, we strongly recommend that you obtain this type of coverage.

Insurance companies are generally not in the business of paying out claims unless they absolutely need to. For this reason, there are many exclusions in coverage, one of which generally includes the failure to adhere to the business judgment rule.

Board Members are not professionals in their capacity as volunteer board members of their Association unless they happen to be a licensed attorney, a certified professional accountant, a credentialed Community Association manager, or other credentialed professional.

The Board Members can generally use a defense called the Business Judgment Rule Defense – this essentially means that the Board did rely upon the advice of professionals/experts,  i.e., Community Association Insurance Professionals, Reserve Specialists, Engineers and Architects, Attorneys, etc.  However, that defense is limited, especially if AI usage has gone unchecked by one of these professionals.

Insurance underwriters are increasingly attuned to the fact that many volunteer board members are using AI to assist with or complete their functions as volunteers, and that this AI generation will generally make their obligations as board members less time-intensive. For this reason, many insurance companies are beginning to include specific exclusions for claims that arise from the misuse of generative AI. Exclusions include, but are not limited to, violations of laws regulating AI or disclosures concerning the use of AI, actual use for development of AI, any alleged violations of laws regulating AI, and any statements, disclosures, or other representations on behalf of the association concerning AI.  Exclusions are so broad that they would deny claims arising out of or in any way involving the use of generative artificial intelligence, including producing text, audio, synthetic data, documents, or policies. This would include the use of ChatGPT, Microsoft 365 Copilot, and other generative artificial intelligence platforms, which board members could utilize to create such policies, communications, or documents on behalf of their community associations.

ISO Office Sample Exclusions:

CG 40 47 Exclusion – Generative Artificial Intelligence (for use with the ISO Commercial General Liability Coverage Part). For use with both the occurrence and claims-made versions, this optional endorsement excludes coverage under Coverage A and Coverage B with respect to bodily injury, property damage, or personal and advertising injury arising out of generative artificial intelligence.

What is the consequence of an exclusion to your DNO policy?

As a preliminary matter, if the insurance company denies coverage due to irresponsible use of generated artificial intelligence, it would require the association to cover the defense of any board member directly out of the association's pocket. If an insurance company has determined that the board member has either used AI improperly or that that AI usage itself was the proximate cause of the injury, it is the basis for a legal claim. That same basis could be used by other board members, a third-party arbitrator, or a court to determine that the board member did not act in good faith with the usage of AI, and that they would not be entitled to indemnification under the association's relevant provisions, or such indemnification contained within the code of regulations or bylaws. The result is that, as a board member, you could be forced to pay your own attorney fees out of pocket if you are sued in your capacity as a board member, and have used AI to the extent that it caused a legal issue for the association.

Let's use the important example of the insurance policy. In this scenario, your declaration states that the association must provide insurance coverage for the entire building, both the units and the common elements. In an effort to clarify a somewhat confusing insurance provision in the declaration, a board member used ChatGPT to generate a policy on behalf of the association to clarify insurance responsibility. The AI-generated policy improperly states that unit owners are responsible for coverage for their units, and the association is only responsible for coverage of the common elements. Later, a major fire occurs, and when claims are made on both the unit owners' HO6 insurance coverage and the association's master policy, it is discovered that the association should have insured the whole building, not just the unit. This gives the individual unit owners' insurers an excuse to state they are not obligated to cover the claim on the unit itself because the association's insurance under the master policy is supposed to be primary under the declaration.

With no coverage for rebuilding individual units, several owners bring a lawsuit against the association and the individual board members. Due to the incorrect AI-generated policy, the association had a shortfall in insurance coverage and acted improperly when seeking renewal of its master insurance policy.

When the association receives notice of the lawsuit, it immediately turns it over to the insurance carrier on its DNO policy. After reviewing the claim, the underwriter or claims adjuster determines that they cannot provide coverage for individual board members because of the AI usage exclusion in the insurance policy. This means that not only will the association not have its claim defended by the insurance company, but it also has a significant insurance shortfall that cannot be made up. The unit rebuilding costs would then be the responsibility of the aggrieved owners, and they would likely argue that but for the board's gross negligence in its use of generative artificial intelligence, they would not have suffered the loss.

Improper Use of AI could lead to the following:

• Denial of insurance coverage for property damage

• Denial of insurance coverage on a D & O policy

• Out-of-pocket attorney fees paid by the board member

• Lawsuits brought by the Association or individual members

• Payment of damages to the owners by the Association or by individual board members

• Loss of insurance coverage or substantial increase in premiums

• Removal of board position by the membership

If you have any questions about the proper use of AI as it relates to your Association, please contact our office.