The persistent growth in demand for digital services and cloud computing, and the relentless advance of AI continues to drive huge demand for data centres, domestically and internationally. An increasingly urgent demand for further capacity is providing a huge opportunity for businesses with expertise in the design, build and operation of data centres and associated digital infrastructure.
There are all manner of insurance considerations in relation to data centres, potentially impacting owners, developers, tenants, as well as those firms engaged to design, build, operate and maintain them. This article focusses solely on professional indemnity insurance (PI).
Digital infrastructure and data centers: Connections beyond insurance
Data centres are sophisticated assets, incorporating advanced technologies and elaborate, sensitive systems requiring precise temperatures, atmospheric conditions and vast amounts of power. Such complex, controlled environments necessitate precise and intricate designs, demanding high-performance standards. CAPEX requirements are high, and procurement of key components is likely to become increasingly challenging in the rush for capacity. Firms must also navigate evolving regulatory climates, environmental concerns and security risks.
Even small errors in the design, construction and operations / maintenance could have significant financial and operational ramifications, and the potential costs of mitigating and rectifying problems could be huge. Consequential losses can and frequently do dwarf the costs of rectification, and such exposure will represent a primary concern for PI underwriters.
Data Centres underpin nearly all digital services and economic activity. With so much reliance upon them and the critical data they process, Insurers will be fixated on potential exposure to consequential / indirect losses stemming from data centre outages, even for very short periods.
As with any new growth area, but exacerbated by the complexity of data centres and heightened demands in relation to AI, Insurers will be wary of insureds rushing into opportunities without appropriate expertise and experience. They will also have concerns stemming from the urgency to build new data centres (and potentially aggressive timelines as a result), and the potential for corner-cutting and rushed project timelines as a result. In the rush for capacity, the procurement of key items will be increasingly challenging and costly, and procurement issues could have problematic ramifications on projects.
Insurers will recognise the power and leverage of some of the biggest companies commissioning data centres, and their ability to impose punitive contractual terms on design teams who may accept them because of a lack of bargaining power and their desire to win work.
There have already been many PI claims in relation to data centres, and there will no doubt be more. Businesses must protect themselves as best possible, both operationally and contractually. They would also be well-advised to provide appropriate comfort to their PI Insurers, to ensure their involvement in this sector doesn’t detract from their attractiveness to insurers. For example:
Clearly, the extent of contractual liabilities assumed is critical, and firms should negotiate as much protection within their appointments as possible. Some examples of the sort of protections that firms should seek are as follows:
These suggestions are by no means an exhaustive list of options, and legal opinion should be sought when considering the inclusion and likely efficacy of contractual clauses. PI Insurers are aware that successfully negotiating such contractual terms is far from easy. But they will still be keen to see that the firms they insure are thinking in this way, particularly in a sector exposed to this degree of risk.
