Author: Tom Harper
Triple net (NNN) leases are a common structure in commercial real estate. Under a traditional NNN arrangement, tenants pay base rent along with property taxes, building insurance and maintenance costs. In return, they typically receive greater control over the space and often benefit from lower base rent. For landlords, the structure can provide more predictable income while shifting many operating expenses to the tenant.
This model works well for many office, retail and industrial properties. Data centers, however, introduce different ownership, operational and infrastructure considerations that can affect how risk should be insured.
When the infrastructure becomes the asset
Many property and business interruption (BI) programs are designed around a straightforward premise: the building is the primary asset. When the structure, roof and core building systems are protected, most of the property's value is accounted for — but data centers are different.
According to the US Department of Energy, data centers represented approximately 4.4% of US electricity consumption in 2023, and that share could rise significantly through 2028 as demand continues to grow.1 The investment supporting that growth extends well beyond the building itself. Critical infrastructure such as generators, switchgear, uninterruptible power supply (UPS) systems and cooling equipment often represents a significant share of a facility's value and operational risk.
As a result, insurance programs developed for traditional commercial properties may not fully align with how a data center operates. Ownership of critical infrastructure can vary by lease structure, and those differences influence where insurable interests reside and how property, business interruption and liability coverage should be considered.
Before placing coverage, it's important to understand who owns the critical equipment, who depends on it and how responsibility is allocated through the lease. Those details often have a greater impact on insurance strategy than the building itself.
Understanding traditional NNN risk allocation
In a traditional NNN lease, responsibilities are generally well defined. The landlord insures the building structure and core systems, while the tenant insures its contents, inventory and improvements. The tenant also carries business interruption coverage based on its own potential loss of income.
This approach works well when ownership and operational responsibilities are clearly separated. In many data center environments, however, the distinction between building systems and mission-critical infrastructure is less straightforward.
Depending on the lease structure, critical power and cooling assets may be owned by the landlord, the tenant or shared among multiple parties. Insurance programs should reflect those arrangements so that coverage aligns with the actual allocation of risk.
How lease structure shapes insurable interest
The appropriate property, business interruption and liability coverage for a data center often depends on how ownership of critical infrastructure is allocated. Unlike many traditional commercial properties, responsibility for power, cooling and other mission-critical systems can vary significantly from one lease structure to another.
As a result, it is important to evaluate where insurable interests reside, who controls key infrastructure and how operational risk is shared among the parties. The lease structure provides the foundation for that analysis.
Powered shell
In a powered shell arrangement, the landlord typically provides the building and base electrical capacity, while the tenant is responsible for building out the data hall environment. That may include raised floors, cooling distribution systems, power distribution units (PDUs), generators and UPS systems.
Because the tenant's infrastructure investment can represent a substantial portion of the total project value, insurance programs should account for those assets throughout both construction and ongoing operations.
Key considerations include:
Builder's risk during construction
Property coverage after occupancy
Turnkey
In a turnkey arrangement, the landlord owns and delivers the building along with the critical infrastructure required to support operations, including generators, UPS systems, switchgear and cooling equipment.
In these situations, attention often shifts to how those assets are valued and insured. While they may be classified as building systems, their replacement costs, repair requirements and operational significance are often very different from those of a traditional commercial building.
Accurately scheduling and valuing critical infrastructure can help ensure property and equipment breakdown coverage reflects the facility's actual exposure.
Colocation
Colocation environments introduce an additional layer of operational interdependence because multiple tenants rely on shared power and cooling infrastructure.
A disruption involving shared infrastructure may affect multiple tenants simultaneously, even when their own equipment remains fully operational. As a result, evaluating business interruption dependencies becomes an important part of the insurance review.
Colocation arrangements can also create unique contractual obligations. Service levels, outage credits and reimbursement provisions often vary by customer agreement, making it important to review insurance coverage alongside contractual commitments to understand how financial responsibilities may be allocated following an event.
Property and business interruption considerations
Regardless of lease structure, several insurance considerations appear consistently across data center environments. Because these facilities rely on highly specialized infrastructure, property and business interruption coverage should reflect operational dependencies that may not exist in traditional commercial real estate.
Equipment breakdown coverage
Generators, UPS systems, switchgear, chillers and cooling equipment are the systems that keep a data center operating. While these assets may be included within a property schedule, they're exposed to mechanical and electrical failures that differ from traditional building risks.
Organizations should evaluate equipment breakdown coverage limits alongside the replacement value and operational importance of critical infrastructure. Doing so can help align coverage with the assets that support facility uptime.
Business interruption dependencies
In turnkey and colocation environments, an organization's operations may depend on infrastructure owned or managed by another party. Even when a tenant's own equipment remains operational, a disruption affecting shared power or cooling systems can still impact revenue-generating activities.
Reviewing contingent business interruption or dependent property exposures can help organizations better understand how operational dependencies may affect financial recovery following an outage.
Contractual remedies and insurance recovery
Service level agreements (SLAs) often provide credits or other contractual remedies when performance standards are not met. However, those remedies may not fully reflect the broader financial impact of an operational interruption.
Evaluating lease agreements, SLAs and insurance coverage together can help organizations understand where contractual obligations end and where additional financial exposure may remain.
Liability considerations in shared infrastructure environments
Data centers often support multiple users, applications and operations through shared infrastructure. As a result, liability exposures may extend beyond the traditional considerations associated with a single-tenant commercial property.
Contractual obligations across multiple tenants
Colocation providers frequently maintain different service commitments for different customers. Service levels, uptime guarantees and reimbursement provisions may vary based on contract terms, infrastructure requirements or service tiers.
Following an outage or infrastructure event, these varying obligations can create a range of financial responsibilities that should be considered as part of the overall risk management and insurance review process.
Infrastructure failures with broad operational impact
A single component failure can affect multiple tenants simultaneously when numerous customers rely on the same power or cooling systems. The resulting disruption may extend across organizations, applications and business operations.
Understanding how many tenants depend on specific pieces of infrastructure can provide important context when evaluating operational risk, contractual obligations and liability exposures.
Underwriting considerations for data center risks
Traditional real estate underwriting often focuses on location, construction type and occupancy. While those factors remain important, data center risks also require a deeper understanding of infrastructure design, operational dependencies and contractual arrangements.
Redundancy design and fault tolerance
Redundancy plays a central role in data center reliability. The Uptime Institute's Tier Classification System evaluates facilities based on factors such as redundancy, maintainability and fault tolerance.2
Facilities designed with N+1, 2N or greater redundancy generally present different operational characteristics than facilities that rely on a single path for power and cooling. Understanding redundancy architecture can help inform underwriting decisions and insurance program design.
Power utilization and infrastructure data
Power consumption, utilization patterns and sub-metering information can provide valuable insight into how a facility operates and where capacity constraints may exist.
In addition to supporting risk evaluation, this information can help establish a clearer understanding of infrastructure dependencies and operational exposures throughout the facility.
Lease structure and contract language
Lease agreements often define ownership responsibilities, performance obligations and operational expectations. Service level commitments, force majeure provisions and uptime guarantees can all influence how risk is allocated among landlords, operators and tenants.
Reviewing lease language alongside insurance coverage can help support consistency between contractual obligations and policy intent, reducing the potential for differing interpretations following a loss.
Align coverage with how risk is allocated
Traditional NNN insurance programs are built around the building. In a data center, risk often extends beyond the structure itself to the power, cooling and other critical infrastructure that supports operations.
Whether a facility is structured as a powered shell, turnkey arrangement or colocation environment, insurance considerations should reflect who owns the infrastructure, who depends on it and how responsibilities are assigned under the lease.
Gallagher works with data center owners, operators, investors and tenants to evaluate these considerations across the insurance program. By aligning coverage with the way risk is actually allocated, organizations can better support their operational and financial objectives.
