Shadow AI is another risk area dealers may not anticipate. Even if leadership is cautious about adopting AI, employees may already be experimenting with it on personal devices or dealership networks. By pasting customer information into a chatbot or using AI tools to draft communications, staff could unknowingly expose sensitive data. Dealers must establish clear policies that govern AI use, backed by IT controls and monitoring. Without this discipline, unauthorized use of AI could open the dealership to data breaches, compliance violations and lawsuits.
Data security is clearly a big concern when it comes to AI. Dealerships handle customer information that is comparable in sensitivity to what banks process: social security numbers, credit data and bank account details. When that information is shared with AI vendors, stored in external servers or fed into evolving models, the risk of leaks multiplies. Dealers need to know whether AI tools store data, how it is transmitted and whether customer information becomes part of the vendor’s training model. These are questions that should be asked before any contract is signed. Indemnification clauses in vendor agreements must be carefully reviewed. Dealers should not take on liability for systems they cannot control.
Dealers should be aware of the regulatory environment. Federal discussions about AI oversight have not yet produced a consistent national framework. Instead, states and municipalities are moving ahead with their own regulations. New York City, for example, has implemented rules addressing bias in technology-assisted hiring, and Colorado has followed similar legislation. For dealers operating across state lines, this patchwork creates uncertainty and the potential for overlapping compliance obligations. Staying informed and seeking legal guidance will be critical as AI laws evolve.
A technical issue to be aware of is the varying reliability of AI outputs. Many AI systems tend to “hallucinate” generating answers, cases or references that sound convincing but are ultimately fabricated, serving to align with user expectations rather than striving for accuracy. For attorneys, this could mean false citations. For dealers, it could lead to inaccurate sales or compliance information being presented to staff or customers. Blind reliance on AI without human oversight can create business and legal exposure. Dealers must treat AI as a tool to assist, not replace, professional judgment.
Despite the risks, AI can be useful to dealerships with thoughtful adoption. AI may eventually streamline complex, repetitive processes such as warranty reimbursement calculations. These areas present real opportunities for efficiency, though customer-facing interactions, the human elements that distinguish dealerships from direct-to-consumer models, should be preserved. The dealer network’s value lies in relationships, trust and service, not just transaction speed. Losing the human element in pursuit of automation could undermine the very reason dealerships exist.
Ultimately, when it comes to implementing AI in your dealership, slow down, think critically and seek trusted advice. Evaluate vendors carefully, ask tough questions about data usage, review indemnification clauses, establish policies to govern internal AI use and above all, remember that while AI adoption may feel like a race, not every dealership decision needs to be made today. Taking the time to adopt AI thoughtfully can prevent costly mistakes tomorrow.
The rise of AI is both an opportunity and a test for dealerships. It is a chance to harness innovation for efficiency while also requiring leaders to sharpen their approach to risk, compliance and governance. By recognizing the AI legal risks for dealerships and planning ahead, retail automotive leaders can ensure technology adoption strengthens customer trust instead of undermining it. By staying engaged with these conversations and proactively addressing the legal implications, dealerships can ensure that AI becomes a tool for growth rather than a source of liability.
