Posted by Marc Rowson, a partner at Legal Futures Associate Lockton
As law firms increasingly integrate artificial intelligence (AI) technologies into their operations, including generative AI (GenAI), the sector is grappling with both opportunities and risks. Firms are not only adopting existing AI tools but are also developing proprietary solutions to enhance their legal services. This evolution raises questions about liability and risk management, particularly as insurers assess how these technologies impact the legal landscape.
The use of AI in legal services encompasses various applications, such as administration, where AI-enabled chatbots handle client inquiries; drafting support through GenAI tools; profiling for error-checking in legal documents; and conducting legal research. Furthermore, AI can automate routine tasks in disclosure and anti-money laundering processes, thereby predicting and mitigating risks. With the ongoing development of AI capabilities, the legal sector is poised to expand its use of these technologies significantly.
However, this technological shift does not come without challenges. Law firms must navigate a complex landscape of potential liability risks associated with the use of AI, particularly when its outputs lead to unfair or incorrect outcomes. Risks common to all organizations employing AI include inadequate training or implementation of AI systems, insufficient monitoring of outputs, lack of staff training, failure to conduct comprehensive risk assessments, and the absence of robust internal policies governing the use of AI tools. Law firms face unique risks, such as the possibility of AI “hallucinations,” where the system generates fictitious legal cases, especially in the absence of thorough human oversight.
Confidentiality breaches represent another significant concern. These may occur when AI is used inappropriately to address client cases, when personal data is inadvertently shared with third-party vendors, or when systems containing sensitive information are compromised. Other potential liabilities include failing to secure informed consent for processing client data, infringing on intellectual property rights while drafting legal briefs, and violating contractual obligations.
The degree of exposure to these risks varies significantly depending on whether firms utilize their own AI tools or third-party solutions. In-house tools allow firms to maintain better control and understanding of their functionality, simplifying risk management. Conversely, while third-party tools may offer quicker and more cost-effective solutions, they often come with less transparency, complicating efforts to identify and mitigate risks. The integration of these tools also introduces counterparty risks, such as the possibility of the tool being discontinued, along with related security and privacy concerns.
Insurers are closely monitoring how AI is reshaping law firms’ operations. As firms apply for coverage, underwriters expect to see evidence of adaptation to these technological changes. While firms are not required to be at the forefront of AI implementation, they should not dismiss the advantages AI can offer. Insurers advocate a balanced approach where law firms embrace AI while remaining cognizant of its associated risks.
Professional indemnity insurance policies are designed to respond when AI performs legal duties and a subsequent claim arises regarding an alleged breach of those duties. Therefore, proactive risk management becomes essential for law firms to fully leverage AI’s potential while minimizing liability. By addressing insurers’ concerns and ensuring compliance with regulations, firms can secure coverage under favorable terms.
Concrete steps for effective AI risk management include developing internal policies and frameworks that govern AI use and regularly updating them as technology evolves. Ongoing monitoring of AI algorithms is crucial, especially for third-party tools, and firms should seek evidence of monitoring processes from their vendors. Comprehensive training for staff on AI technologies and associated risks is necessary, ensuring leadership teams are well-informed about their responsibilities under relevant legislation.
Firms should also ensure that all personnel are aware of the specific risks associated with their departments, particularly concerning intellectual property and data security, as AI tools become more prevalent in their workflows. Engaging with insurance brokers can provide valuable insights into insurer expectations and help shape a firm’s AI risk management strategy.
As the landscape of AI continues to develop, law firms will need to adapt their risk management practices to meet evolving challenges. Insurers are likely to refine their approaches as they gain a deeper understanding of AI-related risks, potentially leading to new questions and evolving insurance products tailored to the legal sector’s unique needs.
See also
OpenAI’s Rogue AI Safeguards: Decoding the 2025 Safety Revolution
US AI Developments in 2025 Set Stage for 2026 Compliance Challenges and Strategies
Trump Drafts Executive Order to Block State AI Regulations, Centralizing Authority Under Federal Control
California Court Rules AI Misuse Heightens Lawyer’s Responsibilities in Noland Case
Policymakers Urged to Establish Comprehensive Regulations for AI in Mental Health
