One of the much-discussed concerns in the insurance industry about artificial intelligence (AI) is the risk of “silent AI” – that is, the seepage of AI-related matters into various insurance coverages that were not intended (at least not consciously) to provide coverage for these kinds of exposures. A new shareholder derivative lawsuit filed against the board of Microsoft provides an illustration of these kinds of concerns in operation. The new derivative suit is a follow-on to prior underlying litigation in which copyright holders allege Microsoft used the holders’ copyright materials to develop its AI products. The new derivative lawsuit alleges that Microsoft’s directors violated their duties to the company by knowingly allowing copyright infringement, causing harm to the company.

The new lawsuit, discussed below, shows how a matter that would not typically be covered under a D&O policy (copyright infringement) can translate into a potentially covered matter (a breach of fiduciary duty lawsuit), and it also shows how AI-related exposures can seep into D&O insurance coverage, as well. A copy of the June 30, 2026, lawsuit filed against certain of Microsoft’s directors and officers can be found here.

Background

Microsoft is one of the world’s largest technology companies. Microsoft has been active in efforts to develop artificial intelligence (AI) products, tools, and solutions, both through its own efforts and through investment in and collaboration with other AI development companies (including, for example, OpenAI). The subsequently filed derivative lawsuit complaint alleges that during the period 2022 to the present, the company “told its shareholders and the market that it did not violate federal copyright laws with respect to development and training of AI software, AI generative models, and products.”

Beginning in September 2023, Microsoft and other defendants were sued in a series of lawsuits filed by or on behalf of authors, publishers, and other copyright holders, alleging that the company or others with whom it collaborated, copied copyrighted material to train AI models, without obtaining licenses, thereby infringing on the plaintiffs’ protected copyrights. Among other things, the complaints allege that Microsoft knew the copyrighted materials were being used for training.

The Lawsuit

On June 30, 2026, a plaintiff shareholder filed a derivative lawsuit in the Western District of Washington against 14 of Microsoft’s directors and officers, as well as Microsoft itself as nominal defendant, alleging that the defendants breached their fiduciary duties and violated Section 14(a) of the Securities Exchange Act of 1934.

The complaint alleges that “Microsoft’s officers and directors caused the Company to issue false and misleading statements touting the success of the Company’s AI strategy” while “concealing material problems, including the fact that Microsoft had violated federal copyright laws in the formulation of its AI strategy and it partnership with AI companies like OpenAI. The complaint also alleges that the defendants concealed the fact that its AI efforts were experiencing undisclosed problems with its AI product, Copilot, including issues with brand positioning, user experience, and capacity.

The complaint further alleges that this “misconduct” caused “substantial damage to Microsoft and its shareholders,” and that the “wrongdoing” was “directly committed or approved by the most senior executive officers and directors of Microsoft.” Among other things, the complaint alleges that the board of directors “received regular reports and approved the key decisions regarding Microsoft’s AI strategy.”

The lawsuit seeks “to hold the Company’s officers and directors responsible for breaching their fiduciary duties, causing the Company to engage in widespread violation of the copyright laws, and approving false and misleading statements, all of which caused substantial damages to the Company.”

Discussion

The new lawsuit against the Microsoft directors is not the first lawsuit of its type in which a company’s board members were hit with a D&O lawsuit alleging the defendants violated their fiduciary duties by knowingly allowing efforts to develop AI models and products to violate copyright holders’ intellectual property rights. As discussed here, in April 2026, a plaintiff shareholder filed a similar lawsuit involving similar allegations against the board of Adobe.

Indeed, this new derivative lawsuit is not even the first lawsuit involving Microsoft alleging that the company issued misleading statements about the company’s AI strategy and the success of its AI products and efforts. As discussed here, in June 2026, a plaintiff shareholder filed a securities class action lawsuit against the company and certain of its directors and officers, alleging that the defendants overstated the company’s AI prospects and success, while downplaying the difficulties it was facing.

While the new lawsuit may reflect allegations that have been seen in prior lawsuits, the derivative suit nonetheless also reflects two important emerging D&O liability exposures.

The first is that the lawsuit shows, in what is something of a recurring phenomenon, how matters that would not otherwise be covered under a D&O insurance policy (in this case, alleged copyright infringement) can be translated into potentially covered D&O claims, through the medium of a follow-on lawsuit.

 This “follow on” lawsuit phenomenon is not new; we recently discussed the same effects in operation in connection with the derivative lawsuit filed against Uber’s board, in which the defendants were alleged to have breached their duties by allowing the company to pursue or continue practices and policies that caused the company to be sued in extensive underlying sexual harassment and assault litigation.

In the Uber post, we cited numerous other examples where follow-on suits translated non-covered underlying matters into potentially covered D&O claims. As we noted, these kinds of follow-on suits illustrate the often-repeated principle that sooner or later everything becomes a D&O claim. The common thread among these kinds of claims is the allegation that the underlying problem was the board’s fault.

The new derivative suit against the Microsoft board also illustrates another phenomenon, which, as noted at the outset, is the phenomenon of “Silent AI.” In this case, it is the seepage of noncovered AI-related intellectual property exposure into the coverage of a D&O insurance policy. The D&O insurers may well contend that that they never intended to pick up these kinds of exposures.

For the insurers, this may be all too reminiscent of the early days when cybersecurity exposure was emerging and the potential for cybersecurity liability to hit various insurance coverages was becoming apparent, a development the insurance industry referred to as “Silent Cyber.” As readers may recall, in connection with cyber liability, the industry soon developed standalone products to try to address the emerging exposures. The same thing may be happening now, as various carriers are coming forward with various kinds of AI-focused products.

In the meantime, the D&O insurers may well want to try to protect themselves against exposures they do not mean to pick up in their policies. Along those lines, the news has recently circulated in the insurance industry press that a number of carriers have developed AI-related liability and claims exclusions. The insurers may well have had scenarios like the one described in the new Microsoft derivative complaint in mind when they conceived of these kinds of exclusions.

The problem for the insurers is that the insurance market currently is in a pronounced soft market phase, meaning that the insurers will have little ability to impose restrictive terms (as buyers will have numerous alternatives available without restrictive terms). However, the insurance market is cyclical, and when the market eventually moves to the next phase, insurers may well seek to restrict their policies’ exposure to “Silent AI.”

The bottom line for now is that as allegedly aggrieved parties continue to conjure up ways in which they allege they have been harmed by artificial intelligence, these parties’ claims may at least potentially trigger parallel follow-on D&O lawsuits, in which the underlying allegations are relied upon to support D&O liability claims.

ICYMI No.1: Just in case you didn’t see it over the holiday weekend, last Thursday I posted an article discussing the new tariff-related securities suit filed against First Solar, a case that is interesting among other things because it shows that even as the Trump administration’s tariff policies continue to shift, tariff-related securities suits continue to be filed. See the post here.

ICYMI No.2: You also may not have seen it over the weekend, but on Friday I reprised my 2012 essay about Time and Summer. This particular post is important to me. I hope you will take the time to read it. Please find the link to the essay here.