How to Update Your Privacy Policy for AI: A Step-by-Step Guide

If you're using AI anywhere in your business—chatbots, automated email responses, content generation, customer analytics, or hiring tools—your privacy policy is probably out of date.

Most privacy policies were written before AI became a standard business tool. They cover general data collection and sharing, but they don't address the specific ways AI systems process personal information. That gap is now a compliance risk.

Several states have passed laws requiring businesses to disclose AI use in specific contexts — including Colorado's AI Act and California's CPRA. The FTC has made it clear they'll enforce against companies that make misleading claims about their data practices. And customers are asking more questions about how their data feeds into AI systems.

This guide walks you through exactly what to update, what language to add, and how to stay compliant without hiring a lawyer.

Why Your Current Privacy Policy Isn't Enough

Traditional privacy policies cover:

• What data you collect
• How you use it
• Who you share it with
• How users can access or delete their data

But they typically don't explain:

• That you're using AI or automated decision-making
• How AI systems process personal data differently than traditional software
• What training data your AI tools use
• Whether human review is available for automated decisions
• How users can opt out of AI processing specifically

Under laws like the California Privacy Rights Act (CPRA), Colorado Privacy Act (CPA), and similar state laws, you need to disclose automated decision-making that produces legal or similarly significant effects. If you're using AI for hiring (covered by NYC Local Law 144), pricing, credit decisions, or other consequential purposes, you have specific disclosure obligations. For a complete overview, see our guide on AI tools disclosure requirements in 2026.

The FTC has also signaled that failing to disclose AI use—especially when it affects how consumer data is processed—can constitute a deceptive practice.

Which Sections of Your Privacy Policy Need Updates

1. Data Collection Section

What to add: Clarify that data may be used for AI training or processing.

Most privacy policies say something like "we collect your email address and purchase history." That's fine, but it doesn't tell users that this data might train recommendation algorithms or feed into predictive models.

Language to add:

"We may use the information we collect to train, test, and improve artificial intelligence and machine learning models that help us [specific purpose: personalize recommendations, automate customer support, analyze trends, etc.]. This may include using your data in aggregated or anonymized form."

If you use third-party AI tools that process customer data, add:

"We use third-party AI services to [specific function]. When you interact with these services, your data is processed according to both our privacy policy and the third party's data handling practices."

2. Data Use and Processing Section

What to add: Specific AI use cases and purposes.

Don't just say "we use data to improve our services." Be specific about AI applications.

Language to add:

"We use artificial intelligence and automated systems for the following purposes:

• Customer support: An AI chatbot may respond to your inquiries and learn from conversations to improve responses
• Content personalization: Algorithms analyze your browsing and purchase history to suggest products
• Fraud detection: Automated systems flag suspicious account activity
• [Other specific uses]"

If you're subject to CPRA or similar laws, you also need to distinguish between using data for the immediate interaction versus retaining it for training:

"Data processed by AI systems during your interaction is used to provide the immediate service. We may retain anonymized or aggregated data to improve our AI models over time."

3. Automated Decision-Making Section

This is the big one that most privacy policies completely miss.

What to add: A dedicated section on automated decision-making and profiling.

Under CPRA, CPA, and other state privacy laws, you must disclose if you use automated decision-making technology that produces legal or similarly significant effects. This includes:

• Hiring or employment decisions (covered specifically by NYC Local Law 144)
• Credit or lending decisions
• Housing decisions
• Access to services
• Pricing or terms offered to customers

Even if your automated decisions don't rise to "legal or similarly significant," it's good practice to disclose them.

Language to add:

"### Automated Decision-Making

We use automated decision-making and AI systems in the following ways:

[Specific use case, e.g., 'Customer Service Routing']: We use AI to analyze your inquiry and route it to the appropriate team member. This does not produce legal or similarly significant effects.

[If applicable]: We do not use automated decision-making for purposes that produce legal or similarly significant effects concerning you, such as employment, credit, housing, or access to essential services.

Your Rights: You have the right to:

• Know when automated decision-making is being used
• Request human review of automated decisions that significantly affect you
• Opt out of certain automated processing (see 'Your Privacy Rights' below)"

If you use AI for hiring, you need additional disclosures under NYC Local Law 144 and similar laws (see our employee AI policy template for internal guidelines):

"AI in Hiring: We use automated employment decision tools to [screen resumes, rank candidates, etc.]. If you are a New York City resident applying for a position, you have the right to request an alternative selection process or accommodation. [Contact information for requests]."

4. Third-Party Services and Tools Section

What to add: Specific AI vendors and their data practices.

If you use tools like OpenAI's API, Google's AI services, HubSpot's AI features, or any other third-party AI service, disclose it.

Language to add:

"We use the following third-party AI services:

• [Service name] for [specific purpose]. [Link to their privacy policy]. Data sent to this service includes [types of data].
• [Service name] for [specific purpose]. This service [does/does not] use data for its own model training.

You can learn more about how these services handle data by reviewing their privacy policies."

Important: Check your AI vendors' terms. Some explicitly state they don't train on customer data (like OpenAI's API terms for most use cases). Others do. You need to know which applies to you and disclose it accurately.

5. Data Retention Section

What to add: How long AI-processed data is kept and in what form.

Language to add:

"Data processed by AI systems may be retained in the following forms:

• Original data: Retained according to our standard retention schedule [link to schedule or specify timeframes]
• Anonymized/aggregated data: May be retained indefinitely for model improvement and business analytics
• Model training data: [Retained for X period] or [deleted after immediate processing] or [not retained for training]"

6. Consumer Rights Section

What to add: AI-specific rights and opt-out mechanisms.

Language to add:

"### Your Rights Regarding AI Processing

In addition to your general privacy rights (access, deletion, correction, etc.), you have the following rights related to AI:

Right to Know: You can ask whether we use AI to process your data and for what purposes.

Right to Opt Out: You can opt out of:

• Having your data used to train AI models
• Automated decision-making for [specific purposes]
• AI-powered profiling or targeted recommendations

Right to Human Review: If an automated decision significantly affects you, you can request review by a human.

How to Exercise These Rights: [Contact method, web form link, email address, or preference center link]

Please note that opting out of certain AI processing may limit functionality, such as personalized recommendations or chatbot support."

Common Mistakes to Avoid

Mistake #1: Being Too Vague

Don't write: "We may use your data with artificial intelligence."

Do write: "We use AI-powered chatbots to respond to customer service inquiries. These chatbots process your messages and may retain conversation data in anonymized form to improve response quality."

Mistake #2: Hiding AI Use in General Language

Don't bury AI disclosures in general "we use technology to improve services" language. Call it out explicitly.

Mistake #3: Contradicting Your Vendor's Terms

If you claim "we never use your data for AI training" but you're using a service that does train on inputs, you've created legal exposure. Always verify vendor practices.

Mistake #4: Forgetting About Chatbots and Customer Support AI

Most businesses remember to disclose analytics AI but forget about customer-facing chatbots. These absolutely need disclosure—they're collecting and processing conversations.

Mistake #5: No Opt-Out Mechanism

Several state laws require you to offer opt-outs for certain AI processing, particularly for profiling and targeted advertising. If you don't provide a mechanism, you're not compliant.

Mistake #6: Copying Privacy Language from Big Tech

Large companies often have complex AI systems and corresponding complex disclosures. Don't copy language that describes capabilities you don't have. Be accurate about your specific AI use.

Before and After Example

Here's how a typical privacy policy section transforms when you add appropriate AI disclosures.

Before (Incomplete)

How We Use Your Information

We use the information we collect to:

• Process your orders
• Respond to customer service inquiries
• Send you marketing communications
• Improve our services
• Analyze site usage and trends

After (Compliant and Clear)

How We Use Your Information

We use the information we collect to:

• Process your orders: Your payment and shipping information is processed to complete transactions

• Respond to customer service inquiries: We use an AI-powered chatbot for initial responses. The chatbot processes your messages and may escalate complex issues to human representatives. Conversation data is retained in anonymized form to improve chatbot responses.

• Send you marketing communications: With your consent, we send promotional emails. We do not use AI to generate personalized marketing content.

• Improve our services: We analyze aggregated, anonymized usage data using machine learning models to identify trends and improve site functionality. This data cannot be traced back to individual users.

• Personalize your experience: We use AI-powered recommendation algorithms to suggest products based on your browsing and purchase history. You can opt out of personalized recommendations in your account settings, though this will result in generic product suggestions.

Automated Decision-Making: We do not use automated decision-making for purposes that produce legal or similarly significant effects, such as employment, credit, or access to essential services.

Third-Party AI Services: We use [Vendor Name] to power our chatbot. Data sent to this service is processed according to their privacy policy [link]. [Vendor Name] does not use customer conversation data to train their general models.

Legal Requirements Driving These Updates

Understanding why you're making these updates helps you tailor them to your specific situation:

California Privacy Rights Act (CPRA): Requires disclosure of automated decision-making that produces legal or similarly significant effects. Effective January 2023, enforced starting July 2023. Gives consumers the right to opt out of automated decision-making.

Colorado Privacy Act (CPA): Similar automated decision-making disclosure requirements. Also requires impact assessments for certain high-risk AI uses. Effective July 2024.

Connecticut Data Privacy Act (CTDPA): Includes automated decision-making disclosure and opt-out requirements. Effective July 2023.

Virginia Consumer Data Protection Act (VCDPA): Covers automated decision-making with opt-out rights. Effective January 2023.

Utah Consumer Privacy Act (UCPA): Lighter requirements but still covers some automated processing. Effective December 2023.

NYC Local Law 144: Specifically regulates AI use in hiring and employment decisions within New York City. Requires bias audits and candidate notification. Effective July 2023.

Colorado AI Act (SB 24-205): The first comprehensive state AI law, addressing high-risk AI systems and requiring impact assessments. Taking effect June 2026.

FTC Enforcement: The FTC has brought cases against companies making false claims about AI capabilities or failing to disclose AI use that affects consumers. Their guidance emphasizes transparency and accuracy.

EU AI Act Influence: While applicable only in the EU, the AI Act's risk-based framework and transparency requirements influence global best practices. Many international companies are adopting EU-compliant disclosures globally.

What If You Don't Use AI?

If you genuinely don't use any AI systems—no chatbots, no automated decision-making, no recommendation algorithms, no third-party AI tools—you can add a simple clarification:

"We do not currently use artificial intelligence or automated decision-making systems that produce legal or similarly significant effects concerning you."

However, review carefully. Many businesses use AI without realizing it:

• Customer service platforms with built-in chatbots (learn more about ChatGPT business disclosure requirements)
• Email marketing tools with AI-powered send-time optimization
• E-commerce platforms with recommendation engines
• Analytics tools with predictive features
• CRM systems with lead scoring

If any of these apply, you're using AI and should disclose it.

Implementation Checklist

• [ ] Audit all systems and tools to identify AI use (including third-party services)
• [ ] Determine which AI uses require disclosure under applicable state laws
• [ ] Verify vendor data handling practices (do they train on your data?)
• [ ] Draft specific disclosures for each AI use case
• [ ] Add automated decision-making section if applicable
• [ ] Create or update opt-out mechanisms
• [ ] Add AI-specific consumer rights language
• [ ] Review and update cookie/tracking disclosures if AI uses cookies
• [ ] Update privacy policy version date
• [ ] Notify users of material changes if required by law
• [ ] Train staff on new disclosures and opt-out procedures
• [ ] Document your AI use inventory for compliance records

Keeping Your Policy Current

AI technology and AI regulation both change rapidly. Plan to review your privacy policy:

• Quarterly: Review for any new AI tools or features you've added
• When launching new AI features: Update before launch, not after
• When regulations change: Monitor state AI laws and FTC guidance
• When vendors change terms: If an AI vendor updates their data practices, you may need to update your disclosures

Set a calendar reminder so this doesn't fall through the cracks.

Getting Help

Updating your privacy policy for AI doesn't have to mean starting from scratch or spending thousands on legal fees. If you're a small business trying to navigate these requirements practically, tools like Attestly can help you generate compliant privacy policies with appropriate AI disclosures based on your specific use cases and applicable state laws.

The important thing is to act now rather than waiting for a complaint or regulatory inquiry. Transparency about AI use isn't just legally required—it builds customer trust and demonstrates that you're taking data privacy seriously.

Frequently Asked Questions