Artificial intelligence has quietly become part of how most companies hire, screening resumes, ranking candidates, and sometimes rejecting applicants before a human ever reviews the file. It’s also becoming one of the fastest-growing sources of employment litigation. For businesses that carry employment practices liability insurance (EPLI), or should, 2026 is the year AI hiring risk stopped being theoretical.
Key takeaways
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Employment practices liability insurance (EPLI) covers claims such as discrimination, wrongful termination, and harassment, but AI-driven hiring decisions are creating exposure many existing policies weren’t written to anticipate.
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The EEOC’s 2023 settlement with iTutorGroup, the first case involving AI-driven hiring discrimination, established that automated screening tools can trigger the same liability as a human decision-maker.
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In the closely watched Mobley v. Workday case, a federal judge conditionally certified a nationwide age discrimination class covering applicants 40 and older screened by Workday’s AI tools since 2020, and ordered Workday to turn over a list of every company that uses its AI hiring products.
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A separate 2026 lawsuit against HR technology vendor Eightfold AI alleges its screening algorithm scored and discarded candidates before a human ever saw their applications, adding a data-privacy angle to the AI hiring liability picture.
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Federal AI-specific guidance for employers has been pulled back since early 2025, but the underlying anti-discrimination laws, including the ADEA and Title VII, still apply regardless of whether a human or an algorithm made the decision.
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States are filling the gap with their own AI hiring rules, including a new Illinois law in effect since January 1, 2026, though the state’s own rulemaking on how to comply remains unfinished as of September 2026.
What Employment Practices Liability Insurance Actually Covers
Employment practices liability insurance protects a business against claims tied to how it hires, manages, and terminates employees. That typically includes discrimination, wrongful termination, harassment, and retaliation claims, along with the legal defense costs that come with them, regardless of whether the claim ultimately has merit. What EPLI generally doesn’t cover includes punitive damages, wages owed, or workers’ compensation-related claims.
Historically, most EPLI claims trace back to a decision made by a manager or HR team. Increasingly, that decision is being made, or heavily influenced, by software.
AI Hiring Tools Are Already Facing Legal Challenges
This isn’t a hypothetical risk. In 2023, the Equal Employment Opportunity Commission settled its first lawsuit involving AI-driven hiring discrimination, EEOC v. iTutorGroup, after the company’s screening software was found to have automatically rejected female applicants age 55 and older and male applicants age 60 and older, in apparent violation of the Age Discrimination in Employment Act. The company paid $365,000 to resolve the claim without admitting wrongdoing, but the case established a precedent that still shapes how these claims are litigated today.
That precedent is now playing out in active, escalating litigation. In Mobley v. Workday, U.S. District Judge Rita Lin rejected Workday’s argument that federal age discrimination law doesn’t apply to job applicants screened by its AI tools rather than direct employees, then conditionally certified a nationwide class covering applicants age 40 and older whose applications were processed by Workday’s AI recommendation system from September 2020 forward. The court also allowed a related California discrimination claim to proceed on behalf of applicants outside California who were evaluated by non-California employers using Workday’s tools, and ordered Workday to produce a list of every company that uses its AI-powered hiring products, a discovery order with implications well beyond Workday itself.
Separately, a 2026 lawsuit filed against HR technology vendor Eightfold AI, backed by former EEOC chair Jenny Yang and the nonprofit Towards Justice, alleges the company scored and screened out job applicants using data it wasn’t authorized to collect, without the disclosures required under the Fair Credit Reporting Act. Eightfold has publicly denied the allegations and moved to dismiss the case, with a hearing held in August 2026. Neither case has been resolved, and the allegations against Eightfold haven’t been proven, but together they show regulators and plaintiffs’ attorneys are treating AI hiring tools as a mainstream, not fringe, litigation target.
Vendors Aren’t the Only Ones Liable, Employers Are Too
One of the more important developments in this litigation is who’s being named as a defendant, and who’s being asked to hand over records. It’s not just the software vendors. Employers that use these tools are being sued directly, on the theory that a company can’t outsource its legal obligations to a third-party algorithm, and the Workday court order requiring a full client list suggests employers who never expected to be part of this litigation could still be identified through it. For a business owner, that means the fact that a hiring tool was built and sold by someone else doesn’t function as a shield.
Federal Enforcement Has Pulled Back, But the Underlying Laws Haven’t Changed
Federal posture on AI in the workplace has shifted meaningfully since early 2025. Following an executive order directing federal agencies to review and roll back AI-related regulations, the EEOC removed several pieces of guidance from its website that had previously helped employers understand how to use AI hiring tools responsibly. That’s a real change in the regulatory environment, but it doesn’t change the underlying law. The Age Discrimination in Employment Act, Title VII, and the other statutes that have always governed hiring decisions still apply in full, whether the decision was made by a person or an algorithm. Less federal guidance generally means less clarity for employers trying to comply, not less legal exposure.
States Are Filling the Gap With Their Own AI Hiring Rules
With less activity at the federal level, states have moved to set their own rules. Illinois amended its Human Rights Act to specifically prohibit AI-driven discrimination in employment decisions and to require notice whenever AI is used in a covered hiring decision, with the law in effect since January 1, 2026. As of September 2026, the state’s own rulemaking process on exactly how that notice requirement should work is still unresolved: Illinois regulators postponed a scheduled rulemaking hearing in June 2026, which means the underlying legal obligation is active even though detailed compliance guidance hasn’t been finalized.
New York City’s Local Law 144, one of the first laws of its kind in the country, requires employers using automated employment decision tools to complete an independent bias audit and notify candidates in advance. Other states have proposed or delayed similar measures, including Colorado, which pushed back and narrowed its own AI law during 2025 and 2026. For employers operating in multiple states, that means compliance requirements can vary significantly depending on where a candidate is located, not just where the company is headquartered.
Does Your Current EPLI Policy Actually Cover AI-Driven Claims?
This is the question most businesses haven’t asked yet. EPLI policies vary in how clearly they address claims tied to automated decision-making, and a policy written a few years ago may not have contemplated AI-driven hiring or termination decisions at all. Before assuming your current coverage responds the way you’d expect, it’s worth confirming with your SandStone Insurance Partners broker exactly how your policy treats a claim where an algorithm, rather than a person, made or influenced the decision being challenged.
What Employers Should Do Now
A few steps are worth taking regardless of company size: confirm with whoever manages your hiring technology what the tool is actually screening for and how, review your EPLI policy language specifically for how it treats automated or AI-assisted decisions, and check whether any state you operate in has adopted its own AI hiring requirements, since compliance obligations increasingly depend on where your candidates and employees are located, not just where your business is based.
Frequently Asked Questions
Does EPLI cover discrimination claims involving AI hiring tools?
It can, but not automatically. AI-driven hiring or termination decisions that produce a discriminatory outcome can trigger the same type of claim EPLI is designed to cover, but policies vary in how clearly they address technology-driven decision-making. It’s worth confirming the specific language with your broker.
Has the EEOC actually taken action against a company for AI hiring discrimination?
Yes. In 2023, the EEOC settled its first AI-related hiring discrimination case, EEOC v. iTutorGroup, after the company’s screening software was found to have automatically rejected older applicants. The company paid $365,000 without admitting wrongdoing.
What is the Mobley v. Workday case, and why does it matter for employers?
Mobley v. Workday is a federal age discrimination lawsuit alleging Workday’s AI-powered applicant screening tools disproportionately rejected candidates age 40 and older. In 2026, the court conditionally certified a nationwide class covering applicants screened by the tool since September 2020 and ordered Workday to produce a list of every employer client that uses its AI hiring products, a discovery order that could expose individual employers to related claims even though they aren’t named defendants yet.
Is there other active litigation over AI hiring tools besides Mobley v. Workday?
Yes. A separate 2026 lawsuit against HR technology vendor Eightfold AI alleges its screening algorithm collected and scored candidate data without required disclosures under the Fair Credit Reporting Act, adding a data-privacy dimension to AI hiring liability alongside the discrimination claims raised in Mobley. Eightfold has denied the allegations and moved to dismiss the case.
If federal AI guidance has been pulled back, are employers less exposed to liability?
No. Federal agencies have scaled back AI-specific guidance since early 2025, but the anti-discrimination laws that govern hiring, including the ADEA and Title VII, haven’t changed and still apply to AI-assisted decisions.
Can my company be held liable if the discrimination came from a third-party hiring software vendor?
Yes. Recent litigation has named employers as defendants alongside, or instead of, the software vendors whose tools they used, on the theory that a business can’t delegate its legal responsibilities to an algorithm.
Do state laws about AI in hiring apply to my business if I’m not headquartered there?
Often, yes. As of September 2026, several states, including Illinois and New York, have adopted AI hiring rules that apply based on where a candidate or employee is located, not where the employer is based, which matters for any company hiring across state lines.
Why Partner With SandStone
AI is reshaping risk across nearly every part of a business, not just cybersecurity. SandStone Insurance Partners helps employers review their employment practices liability coverage against how they’re actually using technology to hire, evaluate, and manage employees today, rather than assuming a policy written years ago still fits. Contact your SandStone advisor today for an EPLI coverage review.
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Disclaimer: This blog provides general educational information about business insurance and is not legal, financial, or insurance advice. Coverage availability, eligibility, sublimits, exclusions, and policy features vary by state, carrier, industry, and individual underwriting. For coverage recommendations specific to your business, contact a licensed agent from SandStone.
