As demand for cloud computing and digital storage continues to accelerate, data centers are being built at unprecedented scale and speed. However, while the buildings themselves may rise quickly, the risks behind them are vast and increasingly difficult to insure.

According to Esdras Martinez, Engineering Underwriter at Munich Re Facultative & Corporate (F&C), the challenge begins from the very first stages of construction. From an insurance perspective, he told IB that construction coverage is effectively a property policy that spans the entire build “from the very first moment, where you still have a greenfield out there, until whatever you build is finished, you hand over the keys to the owner and the term ends.” 

While data center projects often move faster than traditional large-scale developments, typically completing within two to three years, their sheer size introduces a level of exposure that can push market capacity to its limits.

“These projects are relatively big in terms of values, and they also have a large exposure,” Martinez added. “Everything is at the same spot within one big building, or multiple big buildings, but even then each building is very sizable.”

Due to that aggregation of value, insurers are being asked to deploy capacity at levels that few can handle alone. As a result, brokers are increasingly forced to approach every available market to assemble enough coverage. Martinez told IB that they often need to go to multiple insurers and ask for bits of capacity — and, even if that was all added together, brokers might still be short of what they need.

“When you have so many insurance parties participating, it becomes a bigger challenge to line up everybody,” Martinez explained. “[Because] everybody, at the end of the day, needs to be on the same page and offer one set of terms.” 

Typically, a lead insurer is selected to set the wording, which is then taken to the rest of the panel — but Martinez is quick to point out that “it’s usually not that easy, because one might not agree on something and you need to go back.”

As such, to optimize available capacity, programs are often layered with different insurers participating at different loss levels. “Not everybody participates in everything,” Martinez told IB. “With that you can optimise the overall capacity available in the market.”

From a cargo and logistics standpoint, James Sanzone, Cargo Underwriter at Munich Re Specialty – Global Markets, sees many of the same capacity pressures — particularly when it comes to delay in start-up (DSU) exposure.

“On the cargo side, I would echo some of the same,” he told IB. “The market is going to be constrained with capacity.”

And the values at stake can be staggering. If a critical component is damaged or lost in transit, the resulting DSU claim can quickly exceed a billion dollars. 

“It’s important to share the risk with the rest of the market,” Sanzone explained, adding that this is one of the main reasons US data center projects are frequently placed in London. “They’re able to effectively syndicate the risk via various facilities and insurance companies relatively seamlessly. That’s the biggest hurdle we have in the US when it comes to writing these data centers.”

Supply chain pressure is only compounding that risk. With multiple companies racing to secure the same critical equipment, delays are becoming more likely — and more costly.

“Demand for the equipment is high,” Sanzone explains. “If a server or a critical item is damaged and lost in transit, the turnaround time could increase because there’s multiple companies bidding on these items. And that will increase the DSU exposure, ultimately increasing the payout in the event of a loss.”

As data centers move through their lifecycle, the risk profile shifts — often in ways that are not fully understood by project owners. Here, Martinez stressed that exposure does not simply end when construction is complete; instead, it transitions in phases.

“You begin with a certain type of exposure when you build the core and shell,” he told IB. “But then you might be handing certain bits and pieces over to the next coverage, from construction into property — not all at once, but phase by phase. That adds a certain complexity, because you need to be aware what is insured at any given time. Certain assets might or might not be insured by a particular policy. For example, the actual servers in many instances are not even insured under the construction policy. They will be insured later under a separate policy.”

Understanding the underlying business model is critical to structuring coverage correctly. Martinez outlines two dominant approaches — either a company builds the data center and rents it out, or a large technology firm builds and operates it themselves.

“You’re not only insuring physical damage,” Martinez explained. “You’re also insuring the time elements — the lost revenue if a project is delayed and you cannot start operating as soon as you should.”

From a project cargo perspective, Sanzone added that the international nature of many data center materials is also a major risk driver.

“Some of these shipments will be sourced internationally, some domestically,” he told IB. “There could be a large sum of goods sourced internationally, and that presents a unique risk.”

What project cargo coverage brings to the table is risk management, including specialist oversight of transportation methods, load plans, and stability calculations. 

Power infrastructure has emerged as one of the most significant, and least predictable, challenges facing data center operators. Martinez describes it as a growing constraint on development.

“You need a lot of power to make sure the center is running 24/7,” he said. “That power supply is often not readily available, or not available to the extent needed, either because there is a lack of power production or a lack of transmission capabilities.”

Faced with long lead times and limited grid access, some operators are building their own power generation facilities — often without deep experience in the sector. “These data center operators are not from the power generation business,” Martinez added. “They might use used equipment, or repurposed equipment, just to get power quickly.”

And, if a component fails, replacement timelines can stretch into years. “It doesn’t matter who orders it,” he added. “A gas turbine can take one or two years to obtain, and there is simply nothing available.”

Here, Sanzone added that the scale of demand is reshaping the energy landscape entirely. “Per a report released by the Department of Energy, data centers are expected to consume upwards of 6% to 12% of all US electricity by 2028,” he told IB, pointing to high-profile examples such as Microsoft’s agreement to purchase power from the long-shuttered Three Mile Island nuclear facility. “There are certainly challenges to meet that increase in demand.”

Against this backdrop of complexity and uncertainty, both underwriters stress that communication is paramount.

As such, Martinez stressed that you need to understand the project lifecycle from beginning to end.

“If this happens, what coverage picks it up? Construction, property, cargo, time element? If that’s understood, then it’s relatively easy to adapt insurance products and endorsements to fit.”

Ultimately, Martinez believes insurer strength and claims capability should never be overlooked. “If you buy insurance, you want to make sure the insurer is around to pay claims,” he said. “And not only be around, but know what to do on the claim side in a professional way. If I were a client, I would like to know who ends up really carrying my risk.”

For Munich Re, that proposition rests on scale, expertise, and balance sheet strength. Sanzone notes that the group can offer up to $100 million in cover on the cargo side, alongside in-house claims, subrogation, and specialist risk engineering. And, as Martinez told IB, Munich Re’s capacity can extend up to $250 million on a net basis for construction projects.

“This goes 100% onto the Munich Re balance sheet,” he told IB. “We do not buy any reinsurance on a per-deal basis.”

Data center projects require extensive technical know-how, considerable investment and expertise in all areas. The complexity of these multi-stage projects creates a greater need for consistent risk assessment, financial stability, and customized insurance solutions. With Munich Re, you have a reliable, long-term full-service partner dedicated to your success.