QUANTIFYING FINANCIAL AND REPUTATIONAL LIABILITY OF AI HALLUCINATIONS IN LEGAL PRACTICE

Bohdan Demidont

doi:10.32782/2415-3583/39.33

Bohdan Demidont Managing Partner at Demidont & Partners Law Office; Founder of KPI Lex LLC https://orcid.org/0009-0003-7782-3929

DOI: https://doi.org/10.32782/2415-3583/39.33

Keywords: artificial intelligence, legal hallucinations, risk management, financial liability, reputational risk, legal practice, LAHRI, generative AI

Abstract

The article examines the phenomenon of artificial intelligence (AI) "hallucinations" within legal practice and provides a quantitative assessment of the associated financial and reputational liabilities. The study's relevance is driven by the rapid integration of generative AI into law firm workflows and the critical need for accountability mechanisms for the inaccuracy of AI-generated content. Employing a mixed-methods research design, the study synthesizes qualitative data from incident reports with quantitative metrics of financial losses and client trust levels. The author developed and validated the Legal AI Hallucination Risk Index (LAHRI), a tool designed to forecast potential losses based on incident frequency and severity. Findings indicate that risk concentration is highest in legal research and the drafting of procedural documents. The study concludes with practical recommendations for implementing hallucination-detection protocols, mandatory human-validation layers, and adapted risk-management strategies within hybrid human-machine legal environments.

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