Data center developers are under pressure to build more capacity as global investment in digital infrastructure is set to exceed $1 trillion this decade, with hyperscale spending alone expected to top $260 billion in 2025. But as these projects get bigger and involve more advanced technology, traditional insurance policies are struggling to keep up. This gap is opening the door for newer insurance options like parametric coverage and other alternative risk solutions.
Paul Brown, managing partner at The Baldwin Group, says these fresh insurance models are becoming essential. "Insurance often comes as an afterthought," he explains. "People know they’ll need it, but it’s usually treated as something to handle last minute." This approach can create headaches when projects combine real estate with complicated tech, and insurance is introduced too late.
Today’s data centers are different from the past. They mix intense computing power, cooling systems, and even their own power generation. This mix means they face new risks that don’t fit traditional property or construction insurance rules. Many use high-voltage equipment, batteries, and sometimes even repurposed turbines or mobile power to meet urgent electricity demands. Because of this, power reliability has become a top concern.
Big tech tenants like Google and Meta demand near-perfect uptime, often aiming for 99.99% or even 99.999%. Even a short power hiccup, something lasting just 15 seconds, can lead to steep penalties. Those penalties don’t just affect the tenant but also building owners and power suppliers.
Traditional business interruption insurance isn’t well suited for such short outages. Most policies wait 30 days before kicking in, which is too slow for data centers where disruptions are brief but costly. This has fueled interest in parametric insurance and service level agreement (SLA) coverage. Unlike usual insurance that pays based on losses assessed after the fact, parametric insurance pays out when a specific trigger happens, like a voltage drop or a set amount of downtime. SLA coverage focuses on penalties tied to service agreements.
Brown notes these policies handle “micro-interruptions” effectively, covering losses like rent or energy credits that come from SLA breaches. They also help projects secure financing because lenders want assurance that these risks are covered by insurance or similar protections.
Financial risks such as tenant credit quality are also addressed by newer, tailored policies. While some data center tenants are top-tier tech firms, others have less solid credit, creating concern for investors. Insurers are now offering customizable policies that cover specific payment or performance obligations. Brown says the big advantage of parametric insurance is its adaptability—it can be built around the exact details of a deal and its financial impacts.
An important message from Brown is that insurance should come into the conversation early. Data center projects usually take between three and six years, with risks changing throughout planning, design, and construction. Decisions made early can affect how easy it is to get insurance and at what price. Waiting until the last minute can increase costs and make things more complicated.
Seeing insurance as a risk management tool from the start can help projects succeed. “When done well, it can stabilize returns, unlock funding, and support growth,” Brown explains. This is why alternative insurance solutions are gaining popularity as the data center sector grows fast.