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As data center construction booms across the United States, a pair of legal experts recently said the lack of commercial insurance products customized for data centers present potential pitfalls that could surface if operators aren’t paying close attention to policy language.

Amy Koss, an associate attorney at law firm Reed Smith, said in an interview with ÐÓ°ÉPro that while language in existing property/casualty policies can be helpful, it’s not tailored exactly to what data centers need. Sometimes, taking off-the-shelf products and trying to make them fit the unique needs and challenges of the country’s growing number of data centers works fine.

Other times, they just don’t quite fit.

“We’ve been a little bit surprised,” Stephen Raptis, a partner at Reed Smith, said in a June interview. “We expected by now that there would be data center-specific insurance policies out there. But we’ve talked to lots of brokers, and nobody knows about any that exist.”

Koss and Raptis believed it is a matter of when—not if—specialty products would be developed for these facilities.

“They will come in time. Because the [data center] proliferation in the last five years has been unbelievable. Data centers have been around for a while … but the proliferation in the last five [years] has been amazing.”

Demand may be beginning to drive change. Representatives from two large insurance brokers told IJ about a newly launched product and program tailored specifically to data centers.

Unique Insurance Challenges

Once operational, these high-tech facilities carry unique insurance considerations.

Raptis and Koss help clients identify coverage gaps and write language that may work for both the policyholder and insurer. The clients’ insurance brokers then take this feedback and work to implement it into policy language to safeguard the client from potential issues.

For example, an insurance company may require fire suppression systems like sprinklers to insure a property. Those may be great for an office building or retail store, but data centers are essentially warehouses full of electrical equipment, and wetting an entire room of expensive technology would be disastrous.

In most property policies, the servers housed inside data centers are covered as physical assets. However, Raptis explained “a lot of these policies, if not most of them, have specific exclusions for data.” If the servers are physically damaged, they are replaced—but what about all the data saved on them?

“That can be more expensive than the servers themselves to replace,” Raptis said. “So, what do you do with that?” Cyber insurance has long had a component that will cover lost data. Sometimes, though, that coverage triggers only if the data is breached or exfiltrated. It may or may not cover events like a flood or other physical damage.

In other words, if operators and brokers aren’t paying close attention, data centers may have complete protection for their equipment but none for data.

“This is a real potential for a gap,” Raptis said. “For a data center to possibly lose all its data and be surprised that its insurance coverage doesn’t cover that would be a real problem. So, until there are specific products, data center operators are going to have to sit down and read these policies thoroughly and understand where those gaps exist. And understand that one aspect of the operation may be covered, but another won’t.”

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When it comes to business interruption, data centers—especially those that host third-party servers or data—can’t afford to be inoperable for any amount of time, Koss said. The entire data center industry is completely dependent on always-available power.

Losing power isn’t just an inconvenience. It’s an existential issue.

Raptis said brokers involved in finding coverage for data centers may have leverage to negotiate some policies with insurance carriers. Because cyber and errors and omissions policies aren’t written on standard industry forms, centers may have sway when it comes to eliminating or narrowing exclusions, such as a power outage exclusion—especially when a larger premium is involved.

“The point is these policies are not necessarily something the insurance company sends you and you’re stuck with,” Raptis said. “They may be, in a lot of material ways, negotiable.”

Based on the policies Raptis and Koss have reviewed, data center power outages in particular aren’t covered consistently from policy to policy or fully in any policy. Raptis said liability to third parties (often customers) arising from power outages sometimes is excluded altogether.

But he explained that more commonly the exclusions apply to outages from power sources not within the insured’s direct control (such as public utilities) and not to power failures arising from systems that are within the data center’s direct control—such as its cooling or backup power generation systems.

At the same time, as neighbors of data centers grow restless and oppose the noise and emissions the facilities produce, it’s only a matter of time before those general complaints become lawsuits, Raptis said.

“And how … these general liability policies [are] going to respond to these nuisance-type lawsuits remains to be seen,” he added.

New Data Center-Specific Products

Brian Hearst described the spike in spending on data center construction as “an exponential, almost logarithmic growth.” Hearst, managing director of construction for Aon, said three years ago, data center projects ranged between $250 million and $500 million. Today, they start at between $1.5 billion and $2 billion, he said—and his team has encountered some single projects that carried mid-$20 billion price tags.

Aon recently launched a global data center life cycle program (DCLP) that aims to provide “seamless coverage from construction through operational readiness under a single integrated facility,” a press release said. Hearst explained that the velocity-focused program is one tool Aon has created as the professional services firm works to respond to clients who are building these massive projects “that involve a lot of work getting … cover lined up and agreed to ahead of time.”

Key features of the program include up to $1.5 billion for construction all risks (CAR), delay in start-up, operational property damage and business interruption coverages. The DCLP also covers construction cyber physical damage up to $400 million, including construction non-damage cyber, operational cyber and tech E&O. Third-party liability coverage of up to $100 million (excluding U.S. exposures) is offered, as is project cargo and transport insurance up to $500 million.

“By unifying traditionally fragmented coverage across multiple lines of business, DCLP enables clients to reduce friction in procurement, accelerate project timelines and enhance investor confidence,” Aon said in a press release. “The facility also integrates advanced risk engineering and cyber impact modelling to help clients anticipate, quantify, and respond to emerging threats across both physical and digital domains.”

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Meanwhile, Lockton recently launched to the data center market. The coverage—offered through a partnership with Parametrix—delivers immediate financial compensation in the event of an SLA breach. That parametric coverage helps “unlock capital, reduce operational risk, and strengthen financing terms for data center operators, developers, investors, and tenants,” according to a Lockton press release.

The SLA insurance aims to address the growing demand for financial protection against performance risk in digital infrastructure. It provides immediate payouts triggered by predefined violations of SLA terms. Lockton said in the release that developers secure more attractive financing terms by mitigating downtime risk through insured SLA guarantees and that operators unlock escrowed funds, reduce borrowing costs and enhance service reliability.

“As our data center clients seek more robust risk management solutions, this offering provides a level of protection not currently available in the insurance marketplace,” said Trevor Smith, senior vice president and global technology risk practice managing director at Lockton. “Through this facility, our clients benefit from access to Lockton’s top-tier data center risk experts, combined with Parametrix’s comprehensive support to accurately assess risk and ensure fast, transparent claims payments.”

Topics Data Driven