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 Insurance Journal 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.