It seemed like a dream project: generate 50 unique backgrounds for a client’s ad campaign using MidJourney v10. I delivered the files, they paid. Six months later, the US Copyright Office rejected their application to register the campaign art because it wasn’t “human-made.” Now the client is suing me for fraud and professional negligence, claiming I sold them “unprotectable goods.”
Key Takeaways
- Disclosure is your only shield: If you didn’t disclose AI usage in your contract, you are likely in breach of contract (which insurance might not cover).
- The “AI Exclusion” is standard in 2026: Many policies now exclude claims arising from “generative artificial intelligence” unless you bought a specific buy-back endorsement.
- “Failure to Deliver” vs. “Negligence”: The client is arguing you failed to deliver copyrightable work. This is a subtle legal distinction that matters to insurers.
- Prompt Engineering logs are evidence: Your prompts prove your “creative input.” Save them.
The “Why”: The Definition of “Original Work”
Insurance covers you for errors in your professional service.
The Trap: If your contract states you will provide “original, copyrightable work,” and you provide raw AI output (which the Supreme Court has ruled is un-copyrightable), you haven’t made an error; you’ve failed to fulfill the contract terms.
Insurers hate covering “breach of contract.” They want to cover “negligence.” You need a policy that covers “unintentional breach of written contract” and does not have a blanket AI exclusion.
The Investigation: I Quoted 3 Major Carriers
I looked for carriers that have adapted to the AI reality of 2026.
1. Coalition (The Tech-Forward Choice)
- The Pros: Coalition started as a Cyber carrier but moved into Tech E&O. They understand AI better than anyone. They offer specific endorsements for “Technology Services” that include AI prompting as a covered activity.
- The Cons: They require strict cybersecurity protocols (MFA, backups) to even get a quote.
2. The Hartford (The Endorsement King)
- The Pros: As mentioned in other articles, they now offer a specific rider for Generative AI. It costs extra (~$20/month), but it explicitly removes the ambiguity.
- The Cons: If you don’t ask for it, you don’t get it. The base policy excludes it.
3. State Farm (The Traditionalist)
- The Pros: Local agents you can talk to.
- The Cons: My analysis shows they are behind the curve. Their policies are vague regarding AI, leaving the interpretation up to the adjuster at the time of the claim. That is a risky gamble.
[IMAGE: Placeholder for a screenshot of a “Generative AI Exclusion” clause in a PDF policy]
Comparison Table: AI Coverage
| Carrier | AI Explicitly Covered? | Contract Breach Coverage? | Cost | Best For… |
| Coalition | Yes (Built-in for Tech) | Strong | | Tech-heavy designers |
| Hartford | Yes (With Rider) | Good | | Traditional Agencies |
| State Farm | Vague/Silent | Weak | | Local presence lovers |
Step-by-Step Action Plan
- Check Your Contract: Did you promise “Human creation” or just “Deliverables”? If the contract is silent on AI, you have a better defense.
- Locate the “AI Endorsement”: Look at your Declarations page. If you see “Exclusion – Artificial Intelligence,” you are in trouble.
- Gather “Human Element” Proof: Did you Photoshop the AI result? Did you composite it? Compile evidence that human skill was used to modify the AI output. This can trigger coverage under “mixed media.”
- Notify Carrier: Frame the claim as “Alleged failure to secure IP rights,” which is a standard E&O claim.
FAQ
Is AI art illegal to sell?
No. But it is generally uncopyrightable. If you sold it implying it could be owned, that is the error.
Will insurance pay me back for the refund I have to give?
Usually, no. Insurance pays for the client’s damages (lost ad revenue) and your legal fees. It rarely reimburses you for the fee you have to return to the client (that’s considered your own business risk).
What if I retouched the AI art?
That helps. If there is significant human authorship, the work is partially copyrightable. Your insurance lawyer can use this to lower the settlement amount.