CContractors considering a trip or already approaching data center building augmentation would do well to hear some advice from Chase C. Leist, vice president of insurance and risk management at HITT Contracting, and Jason Romero, chief operating officer of Stealth AI Co.
There are many risk-related decisions to make and often in a rush to start work, there is little time to consider gaps in coverage.
Several hundred people sat down with Leist and Romero at the recent International Risk Management Institute Construction Conference in Indianapolis, Nov. 16-19. They answered as many questions as time allowed, but the questions kept coming.
Which type of data center cooling system is more cost effective, air cooled or water cooled? What is the general contractor’s usual scope for server installation and commissioning, and is it done by the general contractor or the owner? In an owner-controlled insurance program, how is the general liability coverage limit for a large project determined?
Leist and Romero tried to cover as much as possible in their allotted time and even distributed a glossary of data center terms for audience members.
Unlike other buildings measured in square feet, data centers are described by the amount of critical energy required to run their racks of servers. Leist said three years ago, the cost of the typical data center was $4 million per megawatt. Now, those costs are typically between $8 million and $12 million, according to multiple sources.
With exorbitant contracts and costs for tenant improvements, the insurance industry is “not surprisingly [has] “I haven’t been keeping up with the data center industry on capacity,” Leist said. “So you have to make decisions about what’s the right total insured value, what’s the right limit for your policy or project when you’re talking about some of these big megacampuses.” And you need to let the entire project team know what’s covered, he said.
Major financial institutions that finance projects may have their own standard insurance requirements or different add-ons to the basic policy. They could include a requirement that there be insurance “for full replacement value”. But when you apply that to a $4 million to $6 million project, “there are some clashes,” Romero said. “The debt community has had to evolve with the insurance community.”
Leist stressed that the project’s builders risk policy, which covers property damage during construction, must cover all owner-furnished electronic equipment in the building. “Make sure you have it because this [the equipment] it’s very expensive,” he said.
Chase Leist, vice president of risk and insurance for HITT Contracting, answers some of the many questions about data center construction insurance at the International Risk Management Institute’s Construction Risk Conference in Indianapolis Nov. 16-19.
Photo: Richard Korman for ENR
A question submitted by an audience member was about what happens if builders risk insurance is applied after the foundation is in place, but before the project “is vertical” and builders risk coverage is in place, and then the foundation is laid.
“Are you seeing foundation exclusions for a claim on work that has been completed” but “before the builders risk policy went into effect?”
Romero didn’t get a chance to fully answer that, but he did say that builders risk insurance should be in place “at the very latest on floats and foundations.” Floaters are special insurance provisions that cover property not covered in a standard insurance policy.
When there’s a lot of machinery in one place, “you have to look at the loss limits” for physical damage and tell the project team what’s covered, he added.
There can be “a lot of fair play” about out-of-pocket costs not covered by the policy, Romero said. Different parts of the project can say, ‘I don’t want to be responsible for a million dollar deductible,'” according to Romero.
Account for large deductibles
One situation Leist believes could arise is if a subcontractor who was already lined up for the job balks at a large deductible that proposed insurance agreements say the subcontractor must pay. “It’s very difficult for a subordinate to manage a million dollar deductible,” he noted. “They might say, ‘I’m not signing my subcontract.’ And we might say, ‘We need you to start on Monday,’ and then they might say, ‘Too bad.’
But the best approach, Leist advised, is to divide the risk equitably “so that no one takes it on the chin” and ensure that there is “third-party risk funding so that everyone can move forward” with the project.
Often, Leist and Romero noted, data center rooms are changed in phases. “It’s not as simple,” Leist noted, “as if we built an office and the tenant moved out and that was it.”
And forget about a “one size fits all” approach when it comes to negotiating with a landlord.
Whether project insurance should be part of an owner-controlled program or a contractor-controlled program “is very project-specific,” Romero said. “All variables are moving targets [and] I can’t remember a project where the design didn’t change and other things changed with it.”
One promising sign, Leist said, was that insurance markets and brokers are starting to use standard policy forms and data center-specific policy endorsements. “These kinds of adaptations … are great and provide an opportunity to close the loop on data centers when it comes to builder risk.”
Filling in coverage gaps, he said, is important “because those kinds of things might not be the same” as with an office building project.
