Are you thinking about using AI? Know the risks

According to a McKinsey’s report, 88% of organisations now use AI in at least one business function, with this figure increasing from 78% the prior year. And it’s not longer only limited to large organisations. Small businesses are adopting AI across a range, from marketing and HR to finance and IT support. Around 80% of Australian small businesses are either already using AI or plan to adopt it within the next six months to two years.

Here are some examples of the main types of AI risks businesses should watch for as adoption grows.

Data and confidentiality risk

AI tools often require users to input information to generate outputs. If staff enter confidential business data, client records, contracts, or financial information into public AI platforms, your business may lose control over how that data is handled.

SMEs that manage sensitive information face higher exposure. Without clear internal guidelines, staff may unintentionally disclose data in ways that breach confidentiality or privacy requirements. Understanding how AI stores, processes, and uses input data is essential before integrating it into operations.

Privacy and regulatory risk

If your business collects or processes personal information, AI use may create additional compliance risk. This is particularly relevant when AI is used to analyse customer data or support decision making.

Privacy exposure increases when automated tools influence outcomes that affect individuals. Even if AI is used as a support function, your business is still responsible for ensuring information is handled lawfully and ethically.

Inaccuracy and bias risk

AI tools can produce responses that appear credible but contain factual errors or incomplete information. If staff rely on these outputs without verification, incorrect decisions can follow.

This risk is significant in areas such as customer communications, marketing claims, financial reporting, technical advice, and healthcare. Inaccurate information may result in misleading representations, financial loss, or contractual disputes.

Intellectual property risk

AI generated content can raise questions about ownership and originality. Depending on the platform used, your business may not have exclusive rights to content produced. There is also a risk that generated material may unintentionally resemble protected works.

Reviewing provider terms and ensuring original review and modification of AI generated material can help manage this risk.

Reputation and customer trust

AI can influence how customers experience a business. Automated responses and AI-generated content may be used in customer communications.

Errors or inaccurate information, or inappropriate AI-generated responses can damage reputation. And for SMEs that rely on long term relationships and referrals, reputation is not an asset that can be treated carelessly. Human oversight remains important in customer-facing organisations.

Workplace and employment risk

Some SMEs use AI tools for recruitment, performance reviews, or workforce analytics. When AI influences decisions about employees or candidates, fairness and transparency become important considerations.

Even where AI is used only as an advisory tool, final decisions should remain subject to human review and documented reasoning. Clear policies about how AI is used in employment processes can reduce this risk.

Contractual and client risk

Many businesses operate under contracts that include confidentiality, security, and data handling clauses. AI use can create exposure if client information is processed through external tools without approval.

Certain industries, including government, healthcare, and financial services, may impose strict controls on how data is managed. SMEs should review client agreements to confirm whether AI use is permitted and whether additional safeguards are required. Failure to comply with contractual obligations can result in disputes or termination of agreements.

Professional liability exposure

For service-based SMEs, AI use may increase professional liability exposure. If AI contributes to an error in advice, reports, recommendations, or deliverables, the business remains responsible for the outcome. Clients typically assess the final service provided, not the tools used internally. If a client suffers financial loss and alleges negligence, the involvement of AI may not reduce the business’s accountability. Maintaining strong review processes and quality controls is essential where AI is used in professional services.

Managing AI risk in a practical way

AI adoption does not require complex governance structures, but it does require clear oversight. SMEs should establish a basic AI use policy that defines approved tools, restricts the entry of sensitive information, and requires review of outputs before external use.

Staff training is also important. Employees should understand the limitations of AI, the importance of data protection, and the requirement for verification.

Where insurance may be relevant

Depending on how AI is used, certain insurance covers may form part of a broader risk strategy. Cyber Liability insurance can manage costs associated with data breaches, system compromise, or business interruption. Professional Indemnity insurance can provide protection against allegations of financial loss.

BizCover offers a wide range of cover options across many industries, with flexible limits to help meet contractual and regulatory requirements. Compare multiple quotes online or chat with one of our customer service agents.