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Liquidated Damages Cover for Data Center Projects

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Data center projects often include clauses in the Service Level Agreement (SLA) for
Liquidated Damages (LD), which are much higher than the LD in the Construction Contract (CC). Developers or owners of data center projects are party to both contracts and carry the liability gap between both. Insurance can help to cover this gap.

Specific challenges of Data Centers (DC)

Party	Tenant / Hyperscaler	Owner / Developer	Contractor
Challenge	Financed expensive IT systems	Financial exposure by LD gap	SLA LD’s pushed to contractor
Exposure	DC not available: No income Loan obligations for IT equipment	LD gap between SLA and CC Severe balance sheet exposure	High LD limits if based on SLA Severe balance sheet exposure
Mitigation	LD clause in SLA	Additional funds or LD Insurance	Limit LD to contract value (CC)
Benefits LD cover	Secures LD payments Reduces insolvency risk of owner	Robust financial situation Smooth contract negotiations Balance sheet protection	LD limit based on CC values Smooth contract negotiations Balance sheet protection

For developers or owners, the difference in these LD payments is a strong burden on their balance sheet. Therefore, often Special Purpose Vehicles (SPV) are founded to limit this liability. These SPVs are not capitalized enough to cover the full LD and liability gap. As a consequence, financing becomes more difficult as banks and investors are aware of this financial gap, which strongly increases the insolvency risk of the SPV.

Munich Re LD Cover:
Transactional Flow and Indemnification

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The solution - an insurance that covers the LD gap

Munich Re offers coverage for a large part of your Liquidated Damages gap if the contractor delays the project and is liable to pay LDs based on the CC.

We assess the prerequisites for the coverage in a professional due diligence process that also covers the contract and the inherent project risks.

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Key aspects of our solution

Comprehensive coverage

Contractor liability focus

Expert due diligence

Your advantages with Munich Re

Additional liquidity

Balance sheet protection

Expert guidance for risk management

How the cover works

The coverage indemnifies the gap of paid SLA LDs and received CC LDs based on the valid contractual obligations between the two original contracts. The indemnification excludes the received contractor LD payments, deductible, and coinsurance to form a strong alignment of all parties involved.

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Alternative applications as operational cover for SLA LDs

LD coverages can be adjusted to insure the contractual liabilities from the SLA during operation. Not meeting the performance parameters like power supply, temperature, humidity, etc., causes high LD payments. Transferring a substantial part of this financial exposure with our operational cover is a great option to reinforce and stabilize your balance sheet.

Download our factsheet:
Liquidated Damages Cover for Data Centers

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