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Procurement technology refers to the various tools and systems businesses may use to support their purchasing processes. As artificial intelligence (AI) continues to evolve, many businesses have also begun integrating this technology into their procurement workflows and granting it additional authority to perform critical actions. While procurement technology was initially used only to research vendors and recommend purchasing decisions, these tools and systems are now taking on increasingly autonomous tasks, including supplier selection and sourcing, contract management and negotiation, and invoice payment.

While AI-driven procurement technology has the potential to help businesses improve their purchasing processes, it also poses unique risks. Left unchecked, any AI-based errors, whether it’s a flawed algorithm or faulty output, could quickly escalate into lasting supplier issues, contractual breakdowns and financial losses. Complicating matters, there has been growing confusion regarding which parties should be held responsible when this technology makes errors that lead to serious consequences.

With this in mind, businesses that delegate greater autonomy and authorization to AI-driven procurement technology must also address accountability. This article provides more information on AI-related exposures in procurement processes, offers more insight into which parties ultimately must own technology-based purchasing decisions, and highlights associated liability and insurance considerations.

AI-related Exposures in Procurement Processes

Over time, AI-driven procurement technology has steadily gained additional authority. What began as simply recommending purchasing decisions for businesses has shifted toward negotiating and executing key actions on their behalf. Although this can prove beneficial, it also opens the door for potential failures. Depending on the algorithms and inputs provided to this technology, it could make flawed decisions and other serious errors that produce costly ramifications. This may include making poor supplier selections, approving unnecessary payments, acting outside established purchasing authority, misinterpreting contract terms or agreeing to unfavorable terms that a human reviewer would reject.

Given these exposures, it’s imperative for businesses implementing AI-driven procurement technology to define clear limits on its overall autonomy and purchasing power. This may entail establishing specific monetary thresholds that require human approval, restricting authority for certain high-impact actions (e.g., supplier awards and renewals), and maintaining detailed records of AI-based purchasing decisions and related human interventions. It’s best for businesses to coordinate with their legal, IT and risk management teams to properly define these limits prior to technology deployment.

Taking Accountability for AI-based Decisions

Even with appropriate limits in place, AI-driven procurement technology may still make poor decisions or execute faulty purchasing actions that lead to severe consequences. In these scenarios, businesses may mistakenly assume that the technology is solely responsible for any related losses. However, this isn’t necessarily the case.

Federal legislation, namely the Electronic Signatures in Global and National Commerce (E-Sign) Act, asserts that a contract remains valid even if electronic agents were used to create it. This means that businesses cannot deny the legal effect of a procurement contract on the basis of AI involvement, so long as the technology’s actions are attributable to the party being bound. This could result in significant contractual and financial challenges for businesses following AI-based procurement errors. In this complex landscape, delegated authorization and accountability have become key pain points in purchasing processes and associated documentation.

Liability and Insurance Considerations

While insurance is available to help mitigate liability exposures and potential losses stemming from AI-driven procurement technology, the scope and extent of this coverage can vary among insurers and depend on the nature of the claim. In particular, businesses that use this technology to make poor purchasing decisions and subsequently face contractual and financial losses may not necessarily have a valid claim based on these factors alone.

It’s possible that professional liability insurance may apply to these losses, but only under specific circumstances. For a claim to be valid, it generally must involve a business using AI-powered tools to provide procurement, consulting or other professional services to its clients, with subsequent errors causing financial harm to those clients. Similarly, technology vendors that provide these tools may qualify for such coverage due to parallel exposures arising from allegations that their products or services failed to perform as intended and prompted customer losses.

In any case, coverage for liability claims involving AI-driven procurement technology largely depends on unique policy conditions, insured services and allegations. Businesses should never assume losses stemming from autonomous AI decisions will apply neatly within their existing insurance portfolio. Working with a trusted insurance professional, such as a broker, can help businesses better understand their exposures and address their specific coverage needs.