Data Center Development Races On Despite Mounting Insurance Risks
With ravenous clients waiting for more computing power, data center developers are pressing to get trillions of dollars in new projects built as quickly as possible, straining insurance providers that would underwrite the expensive properties increasingly built in the path of severe weather.
While data centers include redundancies, expensive buildouts and backup power, they also place concentrated amounts of risk at these new sites. Insurers and general contractors aren't historically set up for such valuable projects in such storm-prone areas.
“A tornado could take an entire site down,” HUB Executive Vice President Kirk Chamberlain said. “The problem is the models insurance companies use were never really designed for a $20B data center because you don’t typically see $20B of anything sitting in the way of a tornado in the Midwest.”
Chamberlain remains worried about the spring of 2026, when a substantial number of megacampuses in the Midwest will open or be under construction in areas in and near Tornado Alley. One developer, ValorC3, claims to have built a tornado-proof data center in Oklahoma complete with steel blast doors and two layers of concrete.
The industry hasn’t had a storm strike a data center yet, but Chamberlain said “it’s a matter of when it’s going to happen.”
In that event, he expects the insurance industry may overreact and raise premiums, as typically happens, leading to significant cost increases across the industry. Many construction insurance firms say data centers are one of their fastest-growing lines of business.
An estimated $2.7T will be spent on new data infrastructure in the U.S. through 2030, according to McKinsey, and a single data center can represent up to $700M in insurable coverage.
Chamberlain told Insurance Journal earlier this year that “these individual [data center] campuses are genuinely threatening to outrun the ability of the property insurance market to support them.”
Insuring a data center project that can cost billions of dollars requires substantial financial backing, including insurance products for builders and operators. Traditionally, the firms building these projects need to be bonded for these substantial developments, which can be cost-prohibitive for smaller builders, though there are other options.
“Data centers are hard to insure generally, just because of the scale,” Chamberlain said. “There are solutions out there, but they were never designed to contemplate a $10B, $20B or $50B site.”
Insurance can take up as much as 10% of a project’s budget, said Jeevan Kalanithi, CEO at OpenSpace.AI, a software tool to help improve construction management.
Typically, a construction firm would be bonded and take out a surety bond covering the cost of the project. In the case of a $20B data center campus, only a few of the largest construction companies can afford something like that. The renovation of LaGuardia Airport in New York City, for instance, was just $5.5B.
That dynamic is leading to a lot more joint ventures and a rush to proceed with whatever coverage is possible, Chamberlain said.
“It's an arms race, right?” he said. “And this is what scares me. We see investors, we see clients, these are all very smart people, but they're not waiting for us to figure out how to solve these problems. They're just proceeding, and they're going to do the best with what we have, which is insufficient, in my opinion.”
Flexential, a firm that develops relatively smaller data centers across the country, has taken additional steps to improve its insurance coverage in recent years as projects and costs continue to rise, CEO Ryan Mallory said.
That includes supplementary insurance beyond what the general contractor carries and bringing on a chief compliance officer. When there are up to 1,000 people and heavy machinery on a worksite, it’s important to make sure you have the correct coverage.
Developers take precautions to minimize risk when choosing sites, and data centers tend to be more battle-hardened structures considering the value of the chips and technology inside.
But when the deciding factor is power availability and access to power, that, more than anything else, becomes the deciding factor in site selection, Marsh Senior Vice President Garrett Johnston said.
“So I'm gonna pick a location that is the perfect underwriting risk,” he said. “If it's not close to major power connectivity, it's irrelevant. Data centers will go where the power is because it’s an order of magnitude easier than creating the power where you want to build.”
“From an insurance standpoint, you’re not driving the bus,” he said.
An exclusive analyst of storm risk for the area near new and future data center sites by First Street found a wide variety of potential exposure. The Meta Hyperion project in Rayville, Louisiana, scored a 6 out of 10 on First Street’s wind-risk metric, rating it as a major risk.
Google’s West Memphis project in Arkansas scored a 4 out of 10, a moderate risk, as did Amazon’s campus in New Carlisle, Indiana, which scored a 3, and Open AI’s Stargate project in Abilene, Texas, which also scored a 3.
Once completed, data centers need insurance for loss of operations as well as the same kinds of property insurance and protection from extreme weather risk, water intrusion and fire that other buildings have, which can be a significant sum for buildings that cost many millions or even billions of dollars.
Data center operators also may operate under agreements with their customers, often referred to as service level agreements, or SLAs, that require continuous operation.
Operators may be able to insure against downtime resulting from power outages, equipment failures or other causes through add-ons to their property or professional liability insurance, or through specialized policies designed to cover liability to customers arising from operational downtime.
In addition, potential liability arising from cyberattacks and loss of computer-stored data (as opposed to computer hardware) is often insured under cyber policies, said ReedSmith Insurance Recovery Group Partner Stephen Raptis.
Operators need to check the fine print and make sure policies cover both physical and digital property damage.
Flexential, for instance, has made sure SLAs for its data centers in Oregon have clauses that cover the company from additional maintenance costs resulting from wildfire smoke requiring more filter replacements for the HVAC systems.
The sheer cost of these projects, where an AI training center can cost $10B, means that risk is being shared among multiple carriers, since larger insurers don’t want to take all the risk of such a large single project.
Data center insurance rates are going up a nominal amount, but because of the rising cost of each development, there’s just a lot more value to protect, Johnston said.
“It's not just a project, it's not just a developer, it's the entire insurance system globally being stretched to its limit right now because of this,” Chamberlain said.
If there were to be a direct hit from a tornado and a payout, that would cause the entire industry to reassess risk and increase premiums, Chamberlain said. In addition, any lost facility would be hard to rapidly replace, with the shortage of electricians and a yearslong wait for many of the advanced chips needed to run the more advanced data centers.
Some companies have introduced data center-specific insurance products. Aon, for instance, announced data center lifecycle insurance in July, while Lockton announced an SLA insurance product in June.
But these are more of a branding exercise than a true solution, Chamberlain said. There’s simply a lot of value and risk seeking coverage. There aren’t many shortcuts to insuring such valuable buildings.
“It's not about the cost of the premium,” Chamberlain said. “It's not even about capacity. It's about the systemic risk that projects like this are injecting into the system. I mean, there’s probably more value in a project we’re insuring outside the city of Cedar Rapids than the entire city of Cedar Rapids.”
