Navigating the Transition from Builders' Risk to Operational Coverage in Data Centers

The rapid expansion of data centers globally is reshaping the construction and insurance industries, presenting a unique set of challenges for brokers tasked with navigating the transition from builders' risk to operational property coverage. As projects grow in scale and complexity, particularly in the United States—which accounts for approximately 90% of data center capacity in the Americas—the lines between construction completion and operational readiness are becoming increasingly blurred.

According to recent projections by JLL, global data center capacity is expected to hit about 200 gigawatts by 2030, nearly doubling its level from 2025. As the industry scales up, the need for a seamless transition in insurance coverage becomes critical, especially as construction costs continue to rise. In 2026, average construction costs are anticipated to increase by 6%, reaching $11.3 million per megawatt, not including technology fit-outs. This surge in costs, coupled with the intricacies of phased project openings, raises pressing questions about risk management and insurance coverage.

Understanding Builders' Risk and Operational Coverage

Builders' risk insurance typically covers property under construction, including buildings and materials on-site, as well as fixtures and equipment. It protects against risks such as fire, theft, vandalism, and certain weather events. However, once the construction phase concludes, coverage must transition to operational property insurance, which provides protection for the building and its contents against risks that may arise during normal operations.

The Challenge of Phased Projects

In large data center developments, the challenge arises from the phased nature of construction. A completed data hall may become operational while adjacent sections are still being built. This creates potential gaps in coverage, as losses in one area could trigger both builders' risk and operational property policies, leading to confusion over which insurer should respond. As Amy Gross, the newly appointed head of Liberty Mutual's North America construction team, points out, “If it's unclear, there is coverage, and the carrier knows what's going on.”

• Phased openings: These make the boundaries between construction and operations less distinct.
• Risk of loss: A single event affecting both operational and under-construction areas could complicate claims.
• Policy developments: Insurers are beginning to create policies that provide operational coverage at the end of the builders' risk period.

The Role of Insurers in Data Center Development

Insurers are becoming increasingly aware of the unique exposure posed by large-scale data center projects. Gross notes that the industry has limited historical claims experience with such substantial developments, which can lead to uncertainty about how policy language will hold up in the event of a catastrophic loss. For instance, she highlights that a $300 billion data center has yet to see a significant catastrophic claim, indicating that the industry is still untested in this arena.

Concerns Over Aggregation and Correlated Vulnerabilities

Aggregation concerns extend beyond single projects; they also involve multiple developments drawing from the same infrastructure. For example, if several data centers in close proximity rely on the same power and water sources, a natural disaster could create correlated vulnerabilities. Insurers are beginning to model these risks, with a keen eye on how these factors influence underwriting decisions.

“Capacity remains available,” Gross asserts, “but carriers are scrutinizing engineering, redundancy, and geographic concentrations.” Clients who provide comprehensive development plans, including later construction phases and operational exposures, afford underwriters better insight into how to allocate capacity across the project lifecycle.

Rising Construction Costs and Their Impact on Insurance Valuation

The escalating costs of materials and labor are not only impacting construction budgets but also significantly affecting insurance valuations. As projects evolve and often extend over several years, accurate assessments of total insured values and required property limits become paramount. For example, if the cost of materials doubles due to market fluctuations, the total insured value must be recalibrated to avoid underinsurance, which could leave clients vulnerable in the event of a loss.

Challenges in the Labor Market

The data center boom is intensifying competition for skilled construction labor. Major owners and contractors can attract the best talent, which may leave smaller projects struggling to find qualified workers. This disparity can lead to issues such as relaxed hiring standards, further complicating risk management.

“What I have seen is a shift, not just from us but from other carriers, toward truly pushing risk engineering upfront,” Gross explains. Insurers are increasingly focused on verifying that they are underwriting the right risks, examining factors such as driver records, fall protection protocols, and measures to prevent construction defects.

Broker Strategies for Effective Insurance Placement

To navigate these complexities, brokers play a crucial role in advising clients on insurance placement. Gross emphasizes the importance of early engagement with underwriters, stating that securing face-to-face interactions—regardless of whether it’s a long-term renewal—can significantly enhance the underwriting process. Such dialogues enable underwriters to grasp the full scope of the client's operations, leading to more tailored coverage solutions.

Key Considerations for Brokers

• Early policy review: Contracts should be reviewed early, especially concerning offsite fabrication and environmental exposures.
• Comprehensive disclosures: Clients must disclose full development plans to allow for accurate risk assessments.
• Engagement with underwriters: Building relationships with underwriters can facilitate a better understanding of client needs and risks.

Key Takeaways

• Brokers must manage the transition from builders' risk to operational coverage effectively.
• Phased project openings complicate insurance coverage and claims processes.
• Accurate valuations are critical due to rising construction costs and potential market fluctuations.
• Early engagement with underwriters is essential for tailored insurance solutions.
• Understanding correlated vulnerabilities is vital for managing aggregated risks.

Frequently Asked Questions

What is builders' risk insurance?

Builders' risk insurance is a specialized form of property insurance that protects buildings under construction. It covers various risks, including fire, theft, and vandalism, while the project is ongoing. This coverage typically ends when the construction is completed and the property is ready for occupancy.

How does operational coverage differ from builders' risk insurance?

Operational coverage kicks in once the construction phase is over, providing protection against risks that can occur during the normal operational life of the building. This includes coverage for incidents like fire, water damage, and liability claims that could arise from the use of the property.

What challenges do phased construction projects present for insurance coverage?

Phased construction projects can create complexities in determining when builders' risk coverage ends and operational coverage begins. With different sections of a project potentially being completed and operational at different times, there can be confusion regarding which policy applies in the event of a loss affecting multiple areas.

What should brokers do to ensure effective insurance placement?

Brokers should engage in early and thorough discussions with their clients to understand the full scope of a project, including all phases of construction and operational plans. Establishing strong relationships with underwriters and providing comprehensive disclosures can lead to better risk assessments and tailored insurance solutions.