Walk into almost any not-for-profit office in 2026 and you will find AI tools in use somewhere. Fundraising teams use them to draft grant applications. Communications staff use them to generate newsletter content and social media posts. Finance teams use them to summarise reports and analyse data. Volunteer coordinators use them to schedule and correspond. The adoption is fast, largely informal, and almost entirely uninsured.
In August 2026, not-for-profit.org.nz published AI risk assessment guidance specifically for community organisations — the first sector-specific guidance of its kind in New Zealand. It identified three categories of AI risk that most charities have not considered: data protection, advice reliability, and accountability gaps. Each of these maps to a potential insurance shortfall.
The Data Protection Gap
When a staff member enters donor data, beneficiary information, or organisational financial details into an AI tool — whether a general-purpose large language model or a specialist productivity tool — that data leaves the organisation's systems and enters the AI provider's environment. What happens to it there depends entirely on the provider's terms of service, which most users do not read in full.
Under the Privacy Act 2020, the charity remains responsible for the personal information it holds, regardless of what third-party tool it shares that information with. If a beneficiary's name, address, or health information is entered into an AI tool and subsequently exposed through a breach of that tool's systems, the charity is the responsible organisation for notification and regulatory purposes — even though the breach occurred in a system it does not control.
Standard cyber insurance policies written in the last three to five years may not clearly address this scenario. The policy was designed around a breach of the organisation's own systems. A breach occurring through a third-party AI tool used by the organisation's staff sits in a grey area that some policy wordings do not resolve clearly. Ask your broker to review your policy specifically for this scenario.
The Grant Writing and Advice Reliability Gap
AI-generated grant applications are increasingly common in the not-for-profit sector. They are faster to produce, often better structured, and — when a human reviews and refines them — frequently competitive. But they carry a risk that paper-based applications did not: the risk of AI-generated inaccuracy.
If an AI tool drafts a grant application that contains an inaccurate representation of the charity's activities, outcomes, or financial position — and the error is not caught before submission — the organisation may be in a position of having made a misrepresentation to a funder. Depending on the nature of the misrepresentation and the funder's terms, this could result in a grant recovery demand, a contractual dispute, or in extreme cases an allegation of fraud.
Professional indemnity insurance typically covers claims arising from negligent misrepresentation in the provision of professional services. Whether the submission of a grant application drafted with AI assistance falls within this cover depends on the policy wording and the circumstances. It is not a settled question, and it is one worth raising with your broker — particularly if your organisation relies heavily on grant income and uses AI tools in the application process.
The Service User Advice Gap
Some charities are using AI tools to assist in the delivery of services to beneficiaries and service users. A budgeting service might use an AI tool to generate initial budget summaries. A community legal service might use AI to draft plain-language explanations of entitlements. A mental health support service might use AI to generate resource suggestions for callers.
In each of these cases, an AI-generated output is being used as input to advice or support provided to a person who may rely on it. If that advice is wrong — if the AI tool produces an inaccurate summary of a legal entitlement, a miscalculated budget, or an inappropriate resource referral — and the service user suffers harm as a result, the question is whether the charity's professional indemnity policy responds.
Professional indemnity policies are written to cover claims arising from negligent acts, errors, or omissions by the insured in the provision of professional services. AI-generated advice used in service delivery sits at the intersection of the insured's professional activity and a third-party tool's output. Whether the policy responds, and to what extent, is not always clear — and the answer may matter significantly for organisations that are increasingly integrating AI into their service delivery.
What Charities Should Do Now
AI risk in the charity sector is not hypothetical. It is already present wherever AI tools are in use — which, by 2026, is most organisations. The response is not to ban AI tools; they provide genuine productivity and capability benefits for resource-constrained organisations. The response is to understand the risk and ensure insurance reflects it.
Three practical steps for any charity using AI tools:
- Audit which AI tools your staff use and what types of data they process — donor information, beneficiary records, financial data, service user communications
- Review your privacy policy and data handling procedures to ensure they address AI tool use, as required by the Privacy Act 2020
- Discuss your AI tool use with your insurance broker at your next renewal and ask specifically whether your cyber, professional indemnity, and public liability policies respond to AI-related claims
The not-for-profit.org.nz guidance published in August 2026 provides a starting framework for AI risk assessment. Using it as a prompt for an insurance review conversation is a practical and timely step for any charity that has adopted AI tools without formally considering the risk implications.
The Broader Picture
AI risk is one dimension of a broader pattern: technology adoption outpacing insurance. Cloud storage, mobile payment platforms, social media fundraising, and now AI tools have all created new risk categories that policy wordings have not always kept pace with. A specialist charity insurance broker who keeps up with the evolving risk landscape — including the guidance being developed by sector bodies and regulators — is the right partner for organisations navigating this territory.
To discuss your organisation's cover and AI-related risk gaps, get a quote from one of our specialist charity insurance brokers.
About the Author
The CharityInsurance Crew — the CharityInsurance crew are your friendly insurance geeks on a mission to make specialist cover simple and accessible for every NZ charity, sports club, and community organisation.