Data centre fires are increasing risk for insurers

Article originally appeared in Insurance Day, March 2026, authored by partner William Brown and trainee solicitor Imogen Severs. 

The global number of data centres is expanding rapidly, driven primarily by surging demand for artificial intelligence and data-intensive digital services. According to an Allianz Commercial study, global data centre spending is predicted to reach up to $7trn by 2030, largely driven by technology companies in the US and China. Construction costs are substantial, with a typical facility ranging between $500,000-$2bn.

Alongside this rapid expansion, there has been a marked increase in data centre fires. Data centre fires are complex, high-value losses with wide-ranging consequences. Common ignition causes include open flames during construction, electrical faults, HVAC failures and inadequate maintenance.

The growing reliance on lithium-ion batteries adds further concern. These batteries carry a known risk of “thermal runaway”, where cells overheat and ignite in a cascading reaction. While such risks are familiar in electric vehicles, their installation within densely packed, high-value data centres creates a particularly hazardous fire-risk.

Geographic and environmental vulnerabilities also add another layer of risk, with many data centres being located in remote regions, exposed to wildfires and extreme heat.

When fires occur, property damage claims are often substantial due to the high value infrastructure. Environmental damage may also arise, including air pollution from toxic smoke plumes and land contamination caused by fire water run-off, triggering environmental liability claims.

Business interruption (BI) claims typically follow physical damage and include loss of revenue, contractual terminations, and increased working costs incurred to relocate services. Cyber insurers may face exposure where data is lost or corrupted. Given the economic importance of the sector – contributing an estimated £4.7bn annually to the UK economy alone – BI and cyber losses typically exceed physical damage losses.

Additionally, owner-operators may seek indemnity under professional liability policies for the defence or settlement of third-party claims arising from service disruption, including allegations of negligence or breach of contract. General liability policies may also be triggered if fires cause bodily injury or damage to neighbouring property.

The scale and complexity of data centres demands project-specific policies containing multiple classes of cover. During construction, developers typically require property damage insurance, professional liability cover and delay and start up cover for financial losses arising from delayed completion.

Once the data centre becomes operational, owner-operators will require integrated property damage and BI cover. As property policies commonly exclude intangible assets such as data, dedicated cyber insurance covering data loss and restoration should be maintained throughout the data centre’s lifecycle.

Insurers can reduce exposure by engaging risk consultants early in the design and construction process to identify and challenge risk-critical decisions. This may include reviewing the electrical design, fire compartmentation and battery systems to prevent latent defects from becoming embedded into the asset.

During the operational phase, Insurers can play an active role in loss prevention by encouraging strict live-working controls and robust maintenance regimes including independent maintenance audits, as opposed to self-certification.

They can also encourage data-driven risk monitoring of temperature anomalies, power quality, smoke and thermal runaway, as well the reporting of incidents, near misses and root cause analyses.

Insureds should also be encouraged to test fire containment and suppression systems under realistic conditions, as opposed to paper compliance and conduct climate-adjusted risk modelling to reflect increasing environmental stressors.

Finally, insurers should suggest testing of backup power and restoration capabilities as well as detailed reviews of business continuity and disaster recovery arrangements.

Insurers that prioritise fire prevention, early detection, effective containment and realistic recovery and failover planning, rather than relying on back-up or suppression measures are better placed to limit both physical damage and the scale of resulting business interruption when incidents occur.

Third-party customer claims arising from damage and disruption to data centres caused by fires can also be expensive. Losses can be mitigated by ensuring SLA’s seek to limit or cap the insured’s liability arising out of such incidents. 

Data centres involve complex construction, installation and operation, creating multiple potential recovery targets after a fire arises. These include electrical contractors which may be targeted where fires arise from electrical faults such as defective wiring, inadequate earthing or failures in commissioning and testing; battery manufactures and suppliers which are increasingly exposed to product liability claims where lithium-ion batteries fail under normal operating conditions; and mechanical and HVAC contractors who may face claims where failure in cooling of ventilation systems leads to the overheating of electrical equipment.

Other targets include engineers and architects who may also be exposed where design defects cause a fire or allow the fire to spread more rapidly throughout the facility, as well as maintenance contractors and facility managers who may be at risk where inadequate inspection, servicing, or monitoring allows known defects or deteriorating conditions to persist.

By combining robust risk engineering, resilience planning and early cause-and-origin investigation, insurers are better positioned not only to manage large and complex claims, but also to support the long-term sustainability of a sector that is now fundamental to modern economic activity.