Preparing Builder’s Risk Claims During Data Center Construction

Frank Russo, Managing Director, Imperium Consulting Group, New York is a nationally recognized claim preparation expert, with more than 25 years of experience advising organizations through complex financial losses and large-scale disruption events. He has helped businesses recover over $10 billion in property, business interruption, cyber, builder’s risk, and other construction-related claims, and is a prominent writer and speaker on the topics of disaster preparedness, claim preparation, and business resilience.

U.S. data center construction is on track to exceed $50 billion annually this year, based on a recent Bank of America Institute analysis. The driver is AI infrastructure, both the data centers themselves and the power generation needed to run them. This is one of the highest construction growth areas in the country, and the projects coming online next are larger than the ones being completed today.

Builder’s risk claims in this space have become more frequent alongside the increase in this type of project work. These are more technical construction projects than general construction, and when something goes wrong, the builder’s risk claim preparation is more technical too.

The general premise for presenting a builder’s risk claim is straightforward. Capture the triggering event, document it, monitor every impact that derives from it, and quantify the costs and delays that follow. Easy in principle, difficult in practice. Doing this during active construction on a live job site is the harder part. Hundreds of workers, dozens of trades, sequenced equipment deliveries, and a logistics chain that has to keep moving while the work of preserving the claim is happening.

Even with that complexity, when a covered loss happens on a project there are familiar issues that can be managed and mitigated. On most builder’s risk claims for general construction, the familiar triggers of fire, flood, and wind cause damage and delay that can press against policy limits, but the path back is usually known and there is room to mitigate. Wet drywall can usually be easily replaced. Custom damaged glass panels can be remade by securing premium time at a plant. An extra shift can be added to pull lost time out of a trade that has flexibility to accelerate. The options are usually there.

Data center losses are proving to be different. The projects are more technical, the equipment is more sensitive, and the schedule has less give in it. A short event can sit on the critical path for months, especially when the damaged gear is electrical or mechanical equipment running on long lead times and narrow tolerances. These emerging issues that must be considered for a builder’s risk claim include:

• Highly sensitive equipment.

Data center equipment has narrow tolerances for moisture, particulates, and temperature swings. Even when a unit is technically salvageable, the path forward to a qualified repair involves controlled drying, certified cleaning, extended monitoring, and re-inspection before the original equipment manufacturer will honor the warranty, if they ultimately stand behind it at all. Every step has to be substantiated with vendor records and environmental logs, and every step takes time. One of the biggest single drivers of claim duration in this category is the dispute over whether a partially affected unit can be qualified for repair or has to be replaced outright.

• Longer lead time replacements.

Data center equipment impacted by a covered loss that cannot be repaired and has to be replaced can run on 6 to 24 month lead times. Many of the major data center owners and developers have locked up factory production years out for this equipment, so when a unit is damaged on a project that was not first in line, expediting an exact replacement is not easy.

• Sequential and Integrated Equipment Commissioning.

Once repaired or replaced equipment is in place, the commissioning of the systems is complex and takes time. Power, cooling, and controls may come online in a defined sequence, and skipping a step is usually not an option the equipment allows.

• Correlated Soft Costs.

The monthly soft costs covered under a builder’s risk claim can be greater than the property damage itself. Extended general conditions, additional interest carry on the project financing, additional architect and engineering fees, and liquidated damages exposure are a few examples of the monthly costs that pile up quickly in this category.

• Delayed Operating Income.

Many data centers are pre-leased to hyperscale tenants on contracts measured in dollars per kilowatt per month. A delay pushes back the meter that turns the building into an income producing asset. Owner-occupied projects built by hyperscalers for their own workloads have a different but parallel exposure, where delay translates into deferred compute capacity and incremental costs to cover the gap enterprise wide.

When a ten-minute storm costs $55 million

A recent builder’s risk claim illustrates how the math actually plays out. A high wind and rain event that lasted less than ten minutes, moved through the site while a pair of electrical rooms were still partially enclosed. Temporary protection was in place but did not hold. Water reached uncommissioned switchgear and cooling units before anyone on site understood what was happening.

The largest single point of contention during the claim were units that had taken on moisture but had not been energized at the time of loss. The insurance carrier’s engineer initially took the position that qualified drying and cleaning would return the units to service. The owner’s team had a different view, supported by manufacturer guidance specific to those units that any moisture exposure prior to commissioning required full replacement to preserve the warranty.

Property damage came in at $20 million, driven largely by the cost to repair and replace the affected equipment. Through the agreed nine-month schedule impact, soft costs including extended general conditions, site overhead, and excess interest to finance the project work for the Owner reached approximately $35 million. (That figure does not include the impact to the revenue producing timing of the data center.)

Considerations for submitting a claim

A few things, more than anything else, decide whether a data center builder’s risk claim moves smoothly or not.

Memorialize the baseline schedule. It is critical to measure all covered delays from the project schedule that existed prior to the loss happening. Insurers want to see a clear impact on the project schedule that is separate from any non builder’s risk claim delays already inside the general construction effort. The cleaner and clearer that separation is presented to the insurer’s experts, the faster the claim moves.

Document the damaged equipment in detail. Photographs alone are not enough. Each piece of long lead equipment needs a documented chain: purchase order, manufacturer inspection, shipping, site receipt, storage conditions, installation date, and commissioning status at the moment of loss. Warranty impacts should be raised early in the discussion with the insurance carrier’s experts.

Track all costs related to the loss. Create a separate job cost number to capture every loss related cost from day one. Work closely as a team across the owner, contractor, and subcontractors to make sure nothing is overlooked.

Tell the story behind the numbers. Along with costs, a claim submission has to include a clear narrative explaining what happened and the actions the team took to mitigate any potential delays. On data center builder’s risk claims, it is important to walk the insurer’s experts through the technical nature of the equipment and the installation process in plain language, in both discussions and the written submission. It is also important to explain the cost benefit of mitigation efforts on the front end and how those efforts can materially reduce financial impacts on the back end.

Work in conjunction with the insurance carrier’s experts. Establish a consistent communication strategy from the start. Provide periodic updates on the progress of the claim, be transparent with the data, and respond quickly to reasonable requests for information. Claims that move are claims where the carrier’s team is not chasing the owner’s team for answers.

As AI related construction continues to grow, the volume of builder’s risk claims in this space will grow with it. Owners and contractors on these projects should be working together well before a loss happens to find practical ways to limit material impacts and delays when something does occur. They should also be prepared to provide insurers and their experts with thorough documentation quickly, so that an already complicated situation does not become harder to resolve, and so that the insurance policy can reimburse the covered costs as efficiently as possible to get the project back on track.