Why Are Cyber Insurers Rejecting Claims Related to AI-Powered Threats?

Table of Contents

• The New Reality: When Your Insurance Doesn't Cover the Future
• The Old Claim vs. The New Dispute: Clear-Cut Hacks vs. Ambiguous AI Attacks
• Why the Rejections Are Surging in 2025
• Anatomy of a Denied Claim: The AI Threat Scenario
• Comparative Analysis: The Primary Reasons for Claim Rejection
• The Core Challenge: Ambiguous Policy Language in the AI Era
• The Future of Defense: The Rise of AI-Specific Insurance Policies
• CISO's Guide to Ensuring Your AI Risks Are Covered
• Conclusion
• FAQ

The New Reality: When Your Insurance Doesn't Cover the Future

In August 2025, cyber insurers are increasingly rejecting claims related to AI-powered threats due to a combination of ambiguous, outdated policy language, the extreme difficulty in attributing these sophisticated attacks, and the aggressive invocation of existing exclusion clauses. The primary reasons for denial are claims of "failure to maintain adequate security controls" against modern threats and the classification of advanced attacks as uninsurable "acts of war" when a nation-state is suspected to be involved.

The Old Claim vs. The New Dispute: Clear-Cut Hacks vs. Ambiguous AI Attacks

A traditional cyber insurance claim was often a straightforward affair. A company would be hit by a known ransomware variant, they would pay the ransom, and the insurer would reimburse the cost based on clear evidence. The attack was a known quantity, and the damages were calculable.

An AI-related claim in 2025 is a complex dispute. The conflict is not just about the financial damages, but about the very nature of the attack itself. Is a data poisoning attack an external "hack," or is it an internal "data management failure"? Was the deepfake voice call that initiated a fraudulent transfer a "social engineering" event, or a novel form of attack not covered by the policy? This ambiguity is where the battle between the insured and the insurer now lies.

Why the Rejections Are Surging in 2025

The insurance industry is grappling with a new class of risk that it is struggling to model and price, leading to a surge in claim denials.

Driver 1: The Rise of Unquantifiable, Catastrophic Risk: Insurers are terrified of systemic risks. An AI worm or a poisoned AI security model deployed by a major software vendor could potentially compromise thousands of their clients simultaneously, leading to an extinction-level loss event for the insurer. They are tightening their policy language to avoid this.

Driver 2: The Blurring Lines of Cyber Warfare: The increased use of sophisticated AI by state-sponsored actors has made the "act of war" exclusion a central point of contention. Because it is so difficult to definitively attribute an AI attack, insurers have more leeway to argue it was a state-sponsored "hostile act" and therefore not covered.

Driver 3: The Rapidly Evolving "Standard of Care": What was considered "reasonable security" in 2020 is now viewed as negligent in 2025. Insurers argue that the standard of due care for a business, even a medium-sized enterprise in the Pimpri-Chinchwad industrial belt, now includes using modern, AI-powered defenses to protect against foreseeable AI-powered threats.

Anatomy of a Denied Claim: The AI Threat Scenario

Consider this plausible scenario:

1. The Breach: A manufacturing company is hit by an autonomous malware agent that evades its traditional, signature-based endpoint protection and causes millions in damages.

2. The Claim: The company files a major claim with its cyber insurer to cover the costs of incident response, business interruption, and data recovery.

3. The Insurer's Investigation: The insurer's forensic team investigates. They determine that the malware was a highly advanced, polymorphic agent with no known signature. They also note that the company had not upgraded its endpoint security to a modern, AI-powered EDR solution.

4. The Rejection Letter: The insurer denies the claim on two grounds. First, they cite the policy's "Failure to Maintain Adequate Security Controls" clause, arguing that using non-AI defenses against a foreseeable AI threat constitutes negligence. Second, they suggest the sophistication of the malware points to a state-sponsored actor, potentially triggering the "Hostile Acts" exclusion.

Comparative Analysis: The Primary Reasons for Claim Rejection

This table breaks down the key arguments insurers are using to deny claims in the AI era.

The Core Challenge: Ambiguous Policy Language in the AI Era

The fundamental challenge is that insurance policies are legal contracts written with very specific language, and AI creates scenarios that this language was never designed to cover. Is a data poisoning attack an external "security breach" or an internal "data management failure"? Is an autonomous AI agent a "malicious actor" in its own right or merely a "tool" used by a human? This deep ambiguity in how to classify these new events is being used by insurers to interpret the policy in their own favor and limit their exposure to massive, unpredictable losses.

The Future of Defense: The Rise of AI-Specific Insurance Policies

The future of the cyber insurance market is the development and adoption of explicit, AI-specific insurance policies and riders. These new policies will be designed from the ground up to address AI-related risks. They will clearly define and provide coverage for perils like data poisoning, adversarial evasion, and deepfake-driven fraud. However, these policies will come with much higher premiums and will require organizations to undergo rigorous pre-qualification audits of their own AI security posture, data governance practices, and defensive capabilities.

CISO's Guide to Ensuring Your AI Risks Are Covered

CISOs must treat their cyber insurance policy as a critical security control that needs to be actively managed.

1. Scrutinize Your Policy with Legal and Brokerage Experts: Do not just accept the standard policy language. Work with your legal counsel and a specialist cyber insurance broker to conduct a deep analysis of your policy's exclusions. Ask direct, scenario-based questions about coverage for AI-specific attacks.

2. Document and Demonstrate Your "AI-Readiness": To combat a potential "inadequate security" rejection, you must be able to document that you are using modern, AI-powered defensive tools (like EDR and NDR) and that you have a mature security program that is aligned with the current threat landscape.

3. Push for Explicit AI Coverage During Renewal: During your next insurance renewal, make explicit coverage for AI-related risks a key negotiating point. Push your insurer for a specific rider or addendum that clearly defines and covers risks introduced by AI-powered attacks. If they refuse, it may be time to look for a more modern insurance partner.

Conclusion

Cyber insurers are rejecting claims related to AI-powered threats because these attacks represent a new, unquantified, and potentially catastrophic class of risk that older policies were not designed to cover. By leveraging ambiguity in policy language and key exclusions like "act of war" and "inadequate security," they are shifting the financial burden of these advanced attacks back to the businesses themselves. For enterprises in 2025, this means cyber insurance can no longer be seen as a simple safety net. It is a complex contract that must be rigorously negotiated to ensure it provides real, unambiguous protection in the escalating era of AI-driven cyber conflict.

FAQ

What is a cyber insurance policy?

It is a type of insurance policy designed to help a business mitigate the costs associated with a cyber breach, which can include incident response, data recovery, legal fees, and financial losses.

What is an exclusion clause?

An exclusion is a specific provision in an insurance policy that states what perils or conditions are not covered by the policy. The "act of war" exclusion is a common example.

What does the "act of war" exclusion mean in cyberspace?

This is a highly contentious area. Insurers use it to deny claims resulting from cyber attacks conducted by or on behalf of a nation-state, but defining what constitutes a cyber "war" is very difficult.

What is "due care" or "adequate security"?

It is a policy requirement that the insured business must take reasonable and appropriate steps to secure its own systems. In 2025, insurers are arguing that "reasonable" now includes deploying AI-powered defenses.

What is a data poisoning attack?

It is an attack where an adversary subtly injects malicious or mislabeled data into an AI model's training set to corrupt its future decisions, potentially creating a blind spot in a security tool.

Can my claim be denied if I don't know who attacked me?

Yes. The problem of attribution is a major challenge. If you cannot prove the attack was a standard criminal act covered by your policy, the insurer may be able to argue it falls under an exclusion.

What is a policy "rider" or "addendum"?

It is an addition or amendment to an insurance policy that can be used to add, remove, or modify the coverage provided by the original policy.

Are there new insurance products for AI risks?

Yes, the market for specific, standalone AI insurance policies or explicit riders for cyber policies is beginning to emerge to address these new, complex risks.

How can I prove my security is "adequate"?

By documenting your security program, aligning with established frameworks (like NIST), using modern security tools (like AI-powered EDR), and conducting regular risk assessments and penetration tests.

Is it possible for an AI attack to be "uninsurable"?

Some insurers are beginning to argue that certain systemic, catastrophic AI-related risks, like the poisoning of a major software vendor's AI model, may be fundamentally uninsurable, much like a nuclear war.

What is the role of the insurance broker?

A specialist cyber insurance broker is a critical partner. Their job is to help you understand the risks, find the best possible policy, and negotiate the terms and language with the insurer on your behalf.

How does this affect my company's budget?

It means that you must budget for both the insurance premiums themselves and for the modern security tools and practices required to be compliant with the policy's "adequate security" clause.

What is an EDR tool?

EDR stands for Endpoint Detection and Response. It is a modern security solution that uses AI and behavioral analysis to detect advanced threats on devices like laptops and servers.

Does this apply to small businesses as well?

Yes. The expectation of "reasonable security" applies to all businesses. While the standard may be different for a small business versus a large enterprise, a complete lack of modern defenses could still be grounds for a claim denial.

What is "silent cyber" or "silent AI"?

It refers to the risk that is not explicitly mentioned in a policy. A traditional policy is "silent" on AI, meaning it's not clear whether AI-specific attacks are covered or not, creating ambiguity.

What is attribution in a cyber attack?

Attribution is the process of reliably identifying the person, group, or nation-state responsible for a cyber attack. It is often an extremely difficult and slow process.

Will my General Liability insurance cover this?

Almost certainly not. Most General Liability policies now have specific and broad exclusions for all forms of cyber-related incidents.

What should I ask my broker today?

Ask them to provide a specific, written analysis of how your current policy would respond to a financial loss caused by a deepfake-driven wire fraud and a data breach caused by a data poisoning attack.

Is it a good idea to have a lawyer review the policy?

Yes, it is highly recommended to have a legal expert who specializes in cyber insurance review the policy language, especially the exclusion clauses, before you sign or renew.

What is the biggest takeaway for my business?

The biggest takeaway is that cyber insurance is not a substitute for a strong security posture. In the AI era, it is a complement to it, and your ability to collect on a claim may depend entirely on the quality of your defenses.