Key Takeaways OpenAI and Anthropic are exploring using investor funds to settle multibillion-dollar copyright lawsuits as traditional insurance falls short. OpenAI has secured only up to $300 million...
Artificial intelligence companies OpenAI and Anthropic are considering tapping their massive war chests of investor funding to settle potential multibillion-dollar lawsuits, as the insurance industry struggles to provide adequate coverage for the emerging risks posed by AI development, according to a Financial Times report published Wednesday.
The move underscores the mounting legal pressure facing AI companies from copyright holders who allege tech firms have systematically used their creative works without permission to train large language models.
OpenAI has secured coverage of up to $300 million for emerging AI risks through major insurance broker Aon, according to people familiar with the company's policy cited by the Financial Times.
However, sources told the newspaper that the coverage falls far short of what is needed to protect against potential losses from multiple multibillion-dollar legal claims.
Kevin Kalinich, head of cyber risk at Aon, told the Financial Times that the insurance sector broadly lacks adequate capacity for AI model providers.
The insurance shortfall has prompted OpenAI to explore alternative risk management strategies, including setting aside investor funding for self-insurance purposes.
The company has discussed establishing a captive insurance vehicle, a ringfenced structure commonly used by large corporations to manage emerging risks that traditional insurers are unwilling or unable to cover, according to two people with knowledge of the matter.
The financial stakes became clearer last month when a federal judge in California preliminarily approved Anthropic's landmark $1.5 billion settlement with a group of authors who alleged the AI startup illegally downloaded their books from piracy websites to train its Claude chatbot.
Justin Nelson, an attorney for the authors, called it the largest publicly reported copyright recovery in history. The settlement amounts to approximately $3,000 per book, covering an estimated 500,000 works.
Anthropic is partly using its own funds to cover the settlement, according to a person with knowledge of the matter cited by the Financial Times.
The copyright lawsuits represent an existential threat to the business model that has powered the generative AI boom.
Copyright owners have launched a series of high-stakes legal actions against tech firms, including OpenAI, Microsoft, and Meta Platforms, alleging unauthorized use of their material to train AI systems.
Prominent authors, including John Grisham, George R.R. Martin, and Jodi Picoult, have joined a class-action lawsuit against OpenAI alleging systematic theft on a mass scale for using their works to train ChatGPT and other tools.
The Anthropic case hinged on a mixed ruling from U.S. District Judge William Alsup in June.
While Alsup found that training AI systems on copyrighted works qualified as fair use under copyright law because it was transformative, he ruled that downloading pirated copies of books did not constitute fair use.
Alsup found that Anthropic had downloaded more than 7 million digitized books from piracy websites, including Library Genesis and Pirate Library Mirror, which it knew had been pirated.
Legal experts estimated that Anthropic could have faced liability in the trillions of dollars if the case had proceeded to trial, given that statutory copyright damages can reach up to $150,000 per work.
William Long, a legal analyst for Wolters Kluwer, said before the settlement that the company was looking at a strong possibility of multiple billions of dollars in damages, potentially enough to cripple or even put Anthropic out of business.
Both OpenAI and Anthropic have raised tens of billions of dollars this year, providing substantial reserves to draw upon for potential settlements.
Anthropic closed a $13 billion funding round in September that valued the company at $183 billion, led by Iconiq, Fidelity Management, and Lightspeed Venture Partners. The company is backed by Amazon and Alphabet.
OpenAI has raised more than any other AI company, with recent funding rounds bringing its valuation to approximately $500 billion.
The company has received significant backing from SoftBank and Nvidia, though Microsoft has reportedly pulled back on funding amid disagreements over OpenAI's shift to a for-profit structure.
Despite massive revenue growth, both companies remain unprofitable. Anthropic expects to make $5 billion in sales this year but, like OpenAI and many other AI startups, has never reported a profit, relying instead on investors to back the high costs of AI development.
The Anthropic settlement is expected to influence ongoing disputes, including lawsuits by authors and newspapers against OpenAI and Microsoft. Legal observers say the case signals that AI companies may increasingly seek negotiated settlements rather than risking potentially catastrophic verdicts at trial.
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