What is your business risking by using AI?

Published on 10th Feb 2026

As more organisation and employees begin to involve AI in their daily operations, it’s important to understand some of the legal risks and accountability involved so that your business doesn’t get caught short.  

With every new technology, there are new risks and responsibilities to understanding. For example, if AI makes a mistake, who is legally accountable? Or do your employees understand that not all data should be fed into open AI software as it may be a privacy or cybersecurity risk?  

We’ve outlined some of considerations employers should make when guiding their employees on AI.  

Understand that AI makes mistakes 

The Large Language Models (LLMs) that most AI platforms use are good at analysing data and predicting what should come next based on previous patterns. This means that any AI system is not infallible. The output you get is based on the data and prompts you put in.  

Therefore, the output is limited by biases, the programming of the software, and the veracity of the data. AI will also struggle with nuance, context and understanding human behaviours. This means that someone needs to be checking both the accuracy of the output, as well as the data that is used to get that result.  

AI errors can carry real consequences, such as inaccurate advice, incorrect decisions, or even discrimination. 

Who Is Liable When AI Gets It Wrong?  

Ultimately, your business is liable if AI gets it wrong. If your business deploys AI for its operations that is not fit for purpose, or that doesn’t have the right level of checks, then it is the business which is responsible for any liabilities as a result.  

For example, if you use AI for monitoring employee productivity and progress without having someone sense check the outcomes, you could be liable for grievances or employment tribunal claims.  

AI recommendations are simply that, a guide to help you save time processing information. If your business acts on that advice without checking for context and nuances, then your business is responsible and not the software.  

Legal Risks of AI in Business 

There are many benefits of using AI software in your business, but you need to do so with an understanding of the legal risks. Our team is on hand to advice if you’re unsure.  

Some of the key risks you may need to consider are:  

Discrimination - as per the example above, if AI makes a biased decision within your employee lifecycle, then your business may face claims under the Equality Act 2010, even in the bias was unintentional.  

Professional negligence - Assuming the AI outcome is correct may put a professional or organisation in breach of their duty of care to clients or employees.  

Contractual liability - If AI errors cause you to breach contractual obligations, you'll typically remain liable to the other party. 

Regulatory compliance - Financial services, healthcare, and other regulated sectors have specific requirements around decision-making processes that AI must satisfy. 

Data Privacy Risks: What Happens When You Put Confidential Information Into AI? 

Organisations may be unknowingly leaving themselves open to risk of breaching data protection laws. Whether or not AI is embedded into your operations, employees may be using open AI sources to support their workloads. This could inadvertently be putting the business at risk.  

For example, someone on the admin team could be tasked with writing a report that pulls through data from multiple departments. If some of this is sensitive financial data, and they use a service such as ChatGPT to save time and summarise the information, you could have a data breach.  

By sharing the data with an open-source platform, it can be used for further training or answers to questions and prompts from people outside of the company. Not only is this a data breach but could put the company at risk from others knowing the sensitive financial information.  

Here are some other privacy risks that businesses need to consider:  

Breaching UK GDPR: Processing personal data through AI requires a lawful basis, appropriate security measures, and often explicit consent. Many AI tools don't provide adequate data protection guarantees, making you the data controller potentially liable for breaches. 

Violating confidentiality obligations: Inputting client information, employee data, or commercially sensitive material into AI systems may breach professional confidentiality duties or contractual non-disclosure agreements. 

Losing control of proprietary information: Some AI platforms use input data to train their models, meaning your confidential business information could end up informing responses to other users or becoming publicly accessible. 

Creating international data transfer issues: Many AI services process data in the US or other jurisdictions, potentially violating UK GDPR requirements around international transfers. 

Cybersecurity Risks: How AI Can Compromise Your Business Security 

AI introduces new cybersecurity vulnerabilities that every business must address. As AI becomes more embedded into business operation, there may be more sophisticated cybersecurity risks that your organisation needs to address.  

Data exfiltration risks: Employees using AI tools may inadvertently leak sensitive company data, intellectual property, or client information to external platforms with inadequate security. 

Prompt injection attacks: Malicious actors can manipulate AI systems through carefully crafted inputs, potentially causing the AI to reveal confidential information or perform unintended actions. 

Third-party vulnerabilities: Your AI vendor's security breach becomes your problem if it exposes your data or compromises your systems. 

AI-powered cyber threats: Criminals are using AI to create more sophisticated phishing attacks, deepfakes, and social engineering schemes targeting your business. 

Supply chain risks: AI systems often rely on multiple third-party components, each representing a potential security weakness. 

Inadequate audit trails: Some AI systems don't maintain sufficient logs to identify security breaches or demonstrate compliance during regulatory investigations. 

What Are the Practical Risks of Over-Relying on AI? 

Beyond the legal risks, there are other considerations to take on how far AI is embedded into the organisation. First and foremost, your team should be questioning the AI outputs, fact-checking and catching any critical errors before they put the business at risk. You hire people for their expertise and experience; they should be applying this when using AI within their roles.  

Bias is a significant risk within business. The algorithm on which the AI is trained may have embedded bias. Again, having people check that the outcome isn’t creating a risk of bias is essential. There is a risk that bias may be amplified by AI, but if those using the software are aware and you have clear processes in place, you can mitigate this risk.  

Most AI models cannot explain their reasoning, and as we’ve already explained, they are not yet able to understand context or nuance. AI also struggles with empathy and emotion, as well as creativity. Therefore, it is important that whoever is using the AI can justify any decision and outcomes based on their experience and knowledge rather than the AI output/  

Finally, AI systems may process personal data in ways that violate UK GDPR without adequate transparency or oversight. It is essential that if you’re embedding AI into your business operations, you understand how this works and what the risks may be to your data processing and data protection.  

What Should Business Owners Do to Use AI Responsibly? 

AI can and does improve productivity within organisations. There are many benefits for business, if AI is used in a safe way. Some of the considerations you may want to make as a business are:  

Common Questions About AI Liability 

Can we be sued if our AI discriminates against someone? Yes. Businesses remain liable for discriminatory decisions even when AI makes them. The Equality Act 2010 doesn't provide an AI exception. 

What if we didn't know the AI was using biased data? Courts expect businesses to conduct due diligence on AI systems before deployment and monitor them afterward. 

Are we responsible if our AI vendor gets hacked? You may share liability, particularly if you failed to ensure adequate security measures or if the breach exposes data you're responsible for protecting. 

Can employees use free AI tools for work tasks? Not without proper risk assessment. Free tools often lack enterprise-grade security and may use input data for training, creating confidentiality and data protection issues. 

Do we need insurance for AI risks? Standard professional indemnity or cyber policies may not adequately cover AI-related claims. Review your coverage and consider specialist AI insurance. 

Looking Forward: AI Regulation Is Coming 

The UK government is developing AI-specific regulation, and the EU AI Act will affect UK businesses operating in Europe. Expect increasing requirements around: 

Businesses that establish strong AI governance now will find compliance easier as regulations tighten. 

Understanding AI risks in business 

AI offers genuine opportunities to improve efficiency, reduce costs, and enhance services. Businesses will realise these benefits when they approach AI with a clear understanding of the risks. 

When AI goes wrong, the law typically looks to the business that deployed it, not the technology itself. Your safeguard is combining AI's capabilities with human judgment, robust governance, and leaning into the expertise of others. 

If you're implementing AI in your business and need guidance on managing the legal, privacy, or cybersecurity risks, professional advice tailored to your specific circumstances can help you capture the benefits while protecting against the pitfalls. Get in touch with the team today.  

This article provides general information and should not be relied upon as legal advice for specific situations. AI governance, data protection, and cybersecurity law are complex and fact-specific areas where professional advice is recommended. 

Written by Iain Garfield (Director (known as Partner))