Construction defect insurance claims for AI data centers

In short

When a defect damages an AI data center under construction, the first policy to look at is builder’s risk, which covers physical loss to the project while it is being built. ISO builders risk form If the owner sues the contractor, the contractor’s liability policy may also respond. ISO CGL form Builder’s risk pays for direct physical loss. The defects exclusion removes coverage for loss caused by the faulty work. An ensuing loss clause restores coverage for loss caused by a covered cause of loss that results from that work. ISO special causes form How much coverage is restored depends on the wording, and a LEG 3 clause restores more than a LEG 1 or LEG 2 clause. Construction Executive analysis

Zurich says the average data center project it insures passed $4 billion at the start of 2026, and delay in start up values of $300 million to $600 million are common. Zurich claims podcast Under a liability policy, the states are divided on whether faulty work is an occurrence. Florida holds that it can be, and Ohio holds that it is not. J.S.U.B. decision, Ohio Northern decision After paying a claim, a builder’s risk insurer may sue the designer. The contractor is usually protected by waivers of subrogation and by the rule that an insurer cannot sue its own insured. Zurich v. Infrastructure Engineering

Why are defect claims on AI data centers harder to resolve?

The legal rules are the same ones that apply on any construction project, but the amounts involved are much larger. The equipment inside an AI data center can be worth more than the building around it. Water and dust can ruin that equipment, and replacing it can take a year or more.

Zurich, a major builder’s risk insurer, says the average project in its construction property book was about $785 million through 2025. Five years earlier, the average was roughly $100 million to $200 million. At the start of 2026 the average passed $4 billion, while build times have stayed at about 24 to 26 months. Zurich also says that in some cases close to $2 now goes into equipment for every $1 spent on the building shell. Zurich claims podcast

Insurance capacity has not grown as fast as project values. One campus can carry $10 billion to $30 billion of insurable value. Builder’s risk limits on the largest projects tend to run $1.5 billion to $3.5 billion, according to Marsh’s national builder’s risk practice leader. An S&P Global analyst put the insured share at about a third of total campus value, half at best. ENR insurance report A large defect loss can exhaust the limit and leave the owner to pay the rest.

Allianz studied 221 claims from the sector, worth about €677 million. Water damage was the most common cause of loss, and fire was the most costly, at 59 percent of the total value. Business interruption, meaning income lost while the site cannot operate, drove the largest losses. Allianz claims report

On large, phased campuses, data halls already in operation run next to active construction. Aon’s North America digital infrastructure lifecycle practice leader told ENR that a construction incident can damage an operating data hall and lead to a claim involving several policies and parties at once. ENR insurance report

Which policies can respond when a defect causes damage?

Several policies can respond to the same defect, and each covers a different kind of loss. The two most important are builder’s risk and commercial general liability, usually called CGL.

Builder’s risk is first party insurance, meaning the policy pays the insured for damage to its own property, here the project while it is being built. The ISO builders risk form covers the building under construction, its foundations, its fixtures and machinery, and the materials meant to become part of it. ISO builders risk form When paired with the ISO special causes of loss form, the policy covers direct physical loss unless an exclusion or limitation applies. ISO special causes form

CGL is third party insurance, meaning it protects the insured when someone else makes a claim against the insured. The ISO form pays the sums the insured must pay as damages because of property damage caused by an occurrence. The form also gives the insurer the right and the duty to defend any suit seeking those damages. ISO CGL form Contractors and subcontractors buy CGL, and in a defect dispute the owner is usually the party suing them.

Professional liability insurance matters most when a design error causes purely financial loss with no physical damage. A paper prepared for a 2026 conference of the Associated General Contractors of America, or AGC, gives the example of a cooling system designed to the wrong heat load. If the data center cannot hold its contract temperatures, rebuilding the system is an economic loss that neither CGL nor builder’s risk covers. AGC data center paper Delay in start up insurance pays the owner, its sponsors and its lenders for the money lost when insured physical damage delays completion. Marsh DSU briefing

The policies also apply in a set order. The ISO CGL form says it is excess over any builder’s risk or installation risk insurance covering the insured’s work. ISO CGL form When both policies cover the same damage to the work, the builder’s risk policy is therefore meant to pay first.

A single loss can involve several of these policies. In Kvaerner, the Pennsylvania Supreme Court held that a contractor’s CGL insurer owed nothing for a damaged coke oven battery built for Bethlehem Steel. The court noted that the contractor had already recovered money under its builder’s risk and professional liability policies. Kvaerner decision My guide to construction insurance for AI data centers explains each of these policies in more detail.

What must the insured do first after a loss?

The insured’s first duties are to notify the insurer promptly and to protect the property from further damage. The insured must also keep records, let the insurer inspect before anything is removed, and send a sworn proof of loss when the insurer asks for one.

The builder’s risk duties

The ISO builders risk form lists what the insured must do after a loss. ISO builders risk form

1. Give prompt notice of the loss, with a description of the property involved.
2. As soon as possible, describe how, when and where the loss happened.
3. Take reasonable steps to protect the property from more damage, and keep a record of what those steps cost.
4. If feasible, set the damaged property aside so the insurer can examine it.
5. When asked, give complete inventories of the damaged and undamaged property.
6. Let the insurer inspect the property, examine the books and records, and take samples for testing.
7. Send a signed, sworn proof of loss within 60 days after the insurer asks for it.
8. Cooperate in the investigation, and answer questions under oath if the insurer requires it.

A proof of loss is a signed, sworn statement containing the information the insurer requests to investigate the claim. Some deadlines run from the date of the loss rather than from the insurer’s request. The ISO builders risk form, for example, pays debris removal costs only if they are reported in writing within 180 days of the damage. ISO builders risk form

The liability policy duties

The CGL form has its own notice rules. The insured must notify the insurer as soon as practicable of an occurrence that may result in a claim. Once a claim or suit is made, the insured must give written notice as soon as practicable and send copies of the legal papers immediately. The insured also must not make a voluntary payment or assume an obligation without the insurer’s consent, except for first aid or at the insured’s own cost. ISO CGL form The voluntary payment rule matters when a contractor wants to fix a defect quickly to satisfy the owner.

What happens if notice is late

Whether late notice ends coverage depends on the state. Some states treat timely notice as a strict condition, and a recent New York decision reaffirmed that late notice alone can bar recovery. Florida presumes that late notice harmed the insurer and requires the insured to prove that the late notice caused no harm. A growing number of courts require the insurer to prove actual prejudice before it can deny a property claim for late notice. Law firm analysis Prejudice here means real harm to the insurer’s ability to investigate.

What the insurer must do

Under the ISO builders risk form, the insurer must give notice of its intentions within 30 days after it receives the sworn proof of loss. The insurer must pay for covered loss within 30 days after it receives the sworn proof of loss. That deadline applies only if the insured has complied with all the terms of the policy and the amount is agreed or an appraisal award has been made. ISO builders risk form Appraisal is a process in which each side picks an appraiser to value the loss, and an umpire decides any difference between them. Under the same form, the insurer keeps its right to deny the claim even after an appraisal.

Some states impose additional duties by statute. In Texas, the prompt payment statute in Chapter 542 of the Insurance Code can apply when a CGL insurer wrongly refuses to pay for a defense. The statute adds interest at 18 percent a year and attorney’s fees. Houston Lawyer article A Texas contractor relied on that statute in an April 2026 suit against six of its CGL insurers. The contractor alleged that some of the insurers failed to acknowledge its claim within the 15 days the statute requires. Insurance Business report

Preserve the evidence before repairing

Rimkus, a forensic engineering firm, notes that the duty to preserve evidence generally begins once a lawsuit is reasonably foreseeable. Premature repairs can lead to a spoliation dispute, meaning a dispute over evidence that was destroyed or altered. Parties often address that risk by giving notice and an opportunity to inspect before work begins. Rimkus forensic article Contractors and owners usually want to resume work quickly to stay on schedule and limit their financial exposure. Envista, another forensic firm, warns that repairs started before an engineer arrives can hide or remove the evidence of what failed. Envista forensic article

A claim consultant writing in Risk & Insurance recommends opening a separate job cost number for the loss on the first day. The same column recommends preserving the baseline schedule as it stood before the loss. Risk and Insurance column A paper for an AGC continuing education session recommends two separate logs. One log records the cost to fix the faulty work, and the other records the cost to repair the resulting damage, because usually only the resulting damage is covered. AGC session paper

How is the loss investigated, and by whom?

The insurer’s adjuster leads the investigation, usually with forensic engineers. On large losses, cost, scheduling and accounting experts join the adjuster’s team, and the owner and the contractor hire their own experts. Each team tries to determine what was damaged, when the damage happened and what caused it.

Who is on the team

Zurich’s major case claims team says it does not send just one or two experts to a data center loss. Zurich sends people who cover both the financial loss and the physical damage, keeps them on site, and works with the insured to keep construction moving. Zurich also notes that several parties may be financing the project, which requires more coordination. Zurich claims podcast The insured assembles its own team of experts. The AGC session paper notes that fees for professionals such as forensic accountants are often a covered expense under the policy. AGC session paper

What the engineers look at

Envista describes the early work of a forensic engineer on a builder’s risk claim. Envista forensic article

• A site visit before repairs or new work cover up the original conditions.
• Interviews with people who saw what happened.
• Design changes, as built drawings and requests for information, compared with what is on site.
• Temporary works, such as shoring or bracing, that may have played a part.
• Stored materials and equipment, with other specialists brought in for building systems.

Envista also notes a point that matters for coverage. Damage is not limited to what can be seen, and a part that looks intact but has lost load capacity can still be damaged.

Timing and cause

Builder’s risk covers loss during a policy period, so the engineers try to determine when the damage occurred. Losses are often discovered late, after work has moved on. Cause is also disputed when a covered event combines with a design weakness. In one Envista case, concrete basin walls at a water treatment plant moved outward during a leak test, and some parties called the water pressure a separate cause. The engineer showed that the design documents required the walls to resist that same pressure, so the failure resulted from a single design flaw. Envista forensic article

Cleaning or replacing equipment

A common dispute on these claims is whether wet or dirty equipment can be cleaned or must be replaced. The Risk & Insurance column describes a wind and rain event that lasted less than ten minutes, in which water reached switchgear and cooling units that had not yet been commissioned. The insurer’s engineer initially said qualified drying and cleaning would return the equipment to service. The owner relied on manufacturer guidance that any moisture before commissioning required replacement to preserve the warranty. Risk and Insurance column

In that claim, property damage reached $20 million. The agreed nine month delay added about $35 million in soft costs, such as extended general conditions, site overhead and extra interest on project financing. The same column recommends a documented record for each piece of long lead equipment. The record should run from purchase order and factory inspection through shipping, site receipt, storage, installation and commissioning status at the moment of loss.

Long replacement times can extend the repair period and increase business interruption costs. Allianz reports lead times of up to 80 weeks for switchgear and 50 weeks for transformers in North America. Allianz claims report

Expert evidence in litigation

If the claim is litigated, the court will examine the experts’ methods. Rimkus points to a December 1, 2023 amendment to Federal Rule of Evidence 702. The amended rule makes clear that the party offering an expert must show, more likely than not, that the opinion rests on sufficient facts and a reliable method, reliably applied. A documented chain of custody for samples supports the weight of that evidence. Rimkus forensic article

Is a defect by itself physical damage?

Usually no. Builder’s risk and CGL both cover physical damage, and most courts and policy forms treat a defect that has not harmed anything as a flaw rather than damage. Most disputes concern where the defect ends and the damage begins.

The Florida condominium case

One example involved a Miami high rise. In Swire Pacific Holdings v. Zurich, the city told the owner that the project’s structural engineer was under investigation. A peer review then found many design errors, and the city withheld the certificate of occupancy. The owner spent about $4.5 million fixing the errors so the building would meet code. Zurich denied the claim as the cost of correcting a design defect rather than physical loss caused by a defect. The building had not collapsed. Swire v. Zurich

The federal appeals court certified the coverage questions to the Florida Supreme Court. Swire v. Zurich The Florida Supreme Court held that the design defect exclusion barred the claim, and that the sue and labor clause applied only when an actual covered loss had occurred or was in progress. Florida Supreme Court opinion A sue and labor clause pays the insured’s reasonable costs of protecting the property from further loss. Money spent to prevent a possible future collapse did not qualify.

What the defect clauses say

Modern defect clauses state the same rule in the policy. Intact’s DE4 defective part clause says insured property is not treated as lost or damaged merely because a defect exists in it. The clause applies that rule to the whole policy form, not only to the exclusion. Intact defective part clause The LEG 3 clause contains a similar sentence. IRMI LEG 3 article

When a weakened structure is damaged

A defect that weakens a structure can count as damage. In South Capitol Bridgebuilders v. Lexington, decided by the federal court in Washington, D.C. in September 2023, concrete was poorly vibrated while it was placed. The result was honeycombing and voids in the abutments and piers of a new bridge. The insurer argued that nothing was damaged, because the concrete was flawed from the moment it set. The court held that the loss of weight bearing capacity was damage under the policy. IRMI LEG 3 article

The same rule in liability coverage

In the J.S.U.B. decision, the Florida Supreme Court held that damage to foundations and drywall caused by a subcontractor’s poor soil compaction was property damage. J.S.U.B. decision In the Pozzi Window decision in 2008, the same court held that a subcontractor’s faulty window installation was an occurrence. Whether the cost of new windows was covered depended on the windows’ condition before installation. If the windows were sound and the faulty installation damaged them, the cost to repair or replace them is covered, because the windows suffered physical injury. If the windows were defective before installation, replacing them only replaces a defective component, which is not property damage. The court returned the case to the federal appeals court to decide which situation applied. The insurer had already paid the homeowner for personal property damaged by the leaks. Pozzi Window decision

Manufacturer warranties raise the same question on data center projects. The AGC paper notes that equipment bought early can be exposed to moisture and condensation, which may void a manufacturer’s warranty. Many builder’s risk policies do not treat a voided warranty as direct physical damage. AGC data center paper

How do the defects exclusions in a builder’s risk policy work?

Nearly every builder’s risk policy excludes faulty design, workmanship and materials, and nearly every one restores some coverage through an exception. Policies differ mainly in how much coverage that exception restores.

The standard exclusion and its exception

The ISO special causes of loss form excludes loss caused by faulty, inadequate or defective planning, design, specifications, workmanship, construction, materials or maintenance. The form then says that if the excluded cause results in a covered cause of loss, the policy pays for the loss caused by that covered cause. ISO special causes form The Zurich builders risk form follows the same pattern. Zurich builders risk form This exception is called ensuing loss or resulting loss coverage.

The ISO form applies this exclusion less broadly than some of its other exclusions. The flood and earth movement exclusions apply regardless of any other cause that contributed to the loss, in any sequence. The faulty work exclusion has no such wording. ISO special causes form

The burden of proof shifts between the parties. The insured first shows a physical loss, and the insurer must then show that an exclusion applies. If an exclusion applies, the insured must show that an exception, such as ensuing loss, restores coverage. AGC session paper

LEG and DE clauses

The London Engineering Group published three model defect clauses in 1996, and LEG 3 was revised in 2006. IRMI LEG 3 article Intact’s DE4 is a similar clause. Each clause separates the excluded defect from the covered damage at a different point. Construction Executive analysis, Intact defective part clause

Lockton, a risk management firm, gives a worked example in Construction Executive. An HVAC unit installed between floors of a five story building catches fire during commissioning, causing $3 million of damage to the unit and the building around it. Engineers trace the fire to undersized electrical wiring. Reaching and replacing the unit requires removing $400,000 of undamaged work, and the wiring needs a $65,000 upgrade. The deductible is $75,000. Construction Executive analysis

Under Lockton’s figures, LEG 1 pays nothing. LEG 2 pays $2,860,000, which is the $3 million less the $65,000 wiring cost and the deductible. LEG 3 pays $3,325,000, which adds the $400,000 cost of removing and replacing undamaged work before subtracting the deductible.

Why LEG 3 is litigated

The South Capitol court also held that the LEG 3 extension was ambiguous, meaning open to more than one reasonable reading. The insurer argued that every cost of correcting the defects was an excluded cost of improving the original work, and the court found the contractor’s narrower reading more plausible. Applying Illinois law, the court construed the clause against the insurer as its drafter and held that the insurer breached the policy. IRMI LEG 3 article IRMI cautions that many insurers use modified versions of the LEG wording, so the ruling may not apply to a different clause.

What does ensuing loss coverage restore?

Courts are divided on the ensuing loss exception. Some courts read the exception to cover any covered damage that follows the defect, while others limit it to damage from a new and separate cause.

Vision One v. Philadelphia Indemnity, a 2012 Washington Supreme Court decision, applied the broad reading. Shoring under a freshly poured concrete floor at a Tacoma condominium failed, and the framing, rebar and wet concrete fell to the level below. The insurer’s engineer blamed a marginal shoring design combined with faulty installation. The faulty workmanship exclusion had a resulting loss clause, and collapse was not an excluded event. The court held that coverage existed under the resulting loss provision. Vision One decision

Two other points from Vision One matter for claim handling. The trial court had ruled that the shoring was separate from the concrete, rebar and forms, so the damage to those items was resulting loss. The Washington Supreme Court also held that the insurer could not rely on a new ground for denial that it had not given when it denied the claim.

Other courts have followed the broad reading. The AGC session paper describes Selective Way, a federal case from Maryland about a building at Towson University, in which a plumbing subcontractor installed a water supply line that leaked. The cost to fix the line was excluded, but the water damage to the building was covered as ensuing loss. The paper also describes Blaine Construction, a federal appeals case. A badly installed vapor barrier let water condense in the ceiling insulation, and the damage to that insulation was covered. AGC session paper

The narrow reading appears in TMW Enterprises v. Federal Insurance, a 2010 federal appeals decision applying Michigan law. The buyer of a recently built condominium and retail building found that the exterior walls had been built badly and that water had corroded the steel frame. Repairs had cost about $3.9 million. The majority held that the water damage was the foreseeable result of the faulty walls, so the water damage remained excluded. Ensuing loss, the majority said, covers independent losses that could not be foreseen, such as a leak that shorts a socket and starts a fire. A dissenting judge would have found the clause ambiguous and ruled for the building owner. TMW v. Federal

The difference matters most for water damage, which Allianz found to be the most frequent cause of loss. Under the reasoning of Selective Way, water damage from a faulty fitting that floods a floor is covered. Under TMW, an insurer can argue that the water damage was the expected result of the faulty work.

Other exclusions that can decide defect claims

Several exclusions outside the defects clause can also decide the outcome. ISO special causes form, Zurich builders risk form

The ISO form also limits water damage claims. It will not pay to repair the defect in the system from which the water escaped. ISO special causes form The AGC paper lists other builder’s risk exclusions that arise on data center projects. They include machinery used to do the construction, damage to existing buildings caused by ongoing work, and contractual liquidated damages. AGC data center paper

How do testing and commissioning change the coverage?

Many costly accidents happen during commissioning, and standard builder’s risk wording excludes many of them. A breakdown of new equipment during testing is often excluded unless the policy includes a testing extension. The operating property policy may not begin until testing is finished, which can leave a gap between the two policies.

Why commissioning is risky

Allianz calls testing and commissioning one of the single highest risk phases in data center construction. Systems operate for the first time and are run close to their limits. Hidden defects can appear, deadlines can leave less time to find faults, temporary power and cooling may lack full backup, and many contractors work at the same time. One Allianz case study involves an AI data center where chiller units cracked during testing and commissioning after being run beyond their design limits. The general contractor’s claim was in the range of $25 million to $50 million. Allianz claims report

Both the ISO special form and the Zurich builders risk form exclude mechanical breakdown and artificially generated electrical current. ISO special causes form, Zurich builders risk form An insurer is likely to rely on those exclusions when new switchgear or a chiller fails the first time it is energized.

What a testing extension adds

Intact’s testing and commissioning extension is an example of wording that restores this coverage. The extension covers direct physical loss caused by electrical and mechanical breakdown during cold testing, hot testing and commissioning. For those losses, the extension deletes the electrical device exclusion and the breakdown exclusion. Intact testing extension The extension defines each step.

• Cold testing means checking parts under dry run conditions, with no heat, no material to process and no connection to the grid or a load.
• Hot testing means checking parts under load or operating conditions, including connection to the grid.
• Commissioning means running the property under normal operating conditions to meet specifications or to train operators.

Coverage under the extension ends at the earliest of the number of days stated in the declarations, the end of testing, or the insured’s acceptance of the project. Each component tested at a different time has its own coverage period. Used equipment is not covered, except for damage that results from its failure. The extension is part of the project limit, not additional to it. The insurer also keeps the right to sue the manufacturer of equipment that breaks down, even if the manufacturer is named as an additional insured.

A commissioning problem is not always an insured loss. The University of California’s risk services office gives the example of a design flaw found during commissioning that keeps a system from reaching its required electrical output. Because no covered peril caused physical damage, the flaw does not trigger delay coverage. UC risk services memo

The gap at handover

Builder’s risk coverage ends on events written into the policy. Coverage under the ISO builders risk form ends at the earliest of policy expiration or cancellation, acceptance by the purchaser, the end of the insured’s interest, or abandonment. Unless the insurer specifies otherwise in writing, coverage also ends 90 days after construction is complete or 60 days after any building is partly or fully occupied or put to its intended use. ISO builders risk form Coverage under the Zurich form ends 90 days after first occupancy, when permanent property insurance applies, or when the owner or buyer accepts the property. It also ends when 75 percent of a commercial building’s floor space is leased, not counting leases signed before construction began. Zurich builders risk form

The operating policy may not begin when builder’s risk ends. One sample operational property clause makes acceptance of new property subject to testing at full design conditions for at least 72 continuous hours and formal acceptance without reservation. Another sample excludes property still in testing until, among other conditions, it has run stably at design performance for 168 continuous hours and the insured has accepted it without reservation. Insurance clause sample If builder’s risk ends at occupancy but the operating policy requires 168 hours of stable running, a loss in between may be covered by neither policy.

On phased campuses, the AGC paper notes that tenants may move into powered shells before the whole project is finished. The paper adds that the law has not settled whether builder’s risk ends with the first occupied phase or the last. AGC data center paper Allianz recommends clearly documented handovers so there is no doubt about practical completion. Allianz claims report

At least one insurer now offers a product for this gap. Zurich’s Data Center Project Guard adds up to 12 months of operational property coverage for phased turnover. The program also covers failures of temporary or permanent climate control systems that can damage equipment before commissioning is complete. ENR builders risk sidebar Zurich says the climate control coverage is aimed at claims for white rust, meaning rust that forms on equipment when failed climate control systems cause condensation. Insurers had often denied those claims as expected, preventable or accumulated losses. Zurich claims podcast My guide to performance guarantees and commissioning for AI data centers covers the contract side of commissioning tests.

When does a contractor’s liability policy cover defective work?

CGL does not pay to redo the faulty work itself. A CGL policy can pay for damage the faulty work causes to other property, and in many states for damage to other parts of the project. Whether faulty work can be an occurrence at all depends on the state.

Is faulty work an occurrence?

The CGL form defines occurrence as an accident, including continuous or repeated exposure to substantially the same general harmful conditions, but the form does not define accident. ISO CGL form Because the form leaves accident undefined, state courts have reached different answers on faulty work.

The Florida Supreme Court held that faulty work neither intended nor expected by the contractor can be an accident. The court rejected the argument that damage from defects is always foreseeable, and it rejected the idea that a breach of contract can never be an accident. J.S.U.B. decision The Texas Supreme Court reached a similar result in its Lamar Homes decision. The Texas court added that the economic loss rule is a liability defense or remedies doctrine and not a test for insurance coverage. Houston Lawyer article

AmWINS, a wholesale broker, reports that six state supreme courts ruled on the question between 2012 and 2014, and that only Ohio ruled firmly against coverage. Georgia’s supreme court accepted that faulty work can be an occurrence, but held that property damage means harm to property that was not itself defective. AmWINS also reports that Arkansas, Colorado, Hawaii and South Carolina passed laws requiring CGL policies to define occurrence to include damage from faulty workmanship. AmWINS client advisory

The Ohio Supreme Court took the opposite view and held that damage caused by a subcontractor’s faulty work is not fortuitous, so it is not an occurrence. The case involved a university hotel estimated to cost $8 million, with repairs the university estimated at about $6 million. The court acknowledged that its view differed from recent decisions of other courts. It noted that the Arkansas legislature had changed the rule there by statute after a similar court decision. Ohio Northern decision The Pennsylvania Supreme Court also held that faulty workmanship lacks the fortuity of an accident and that covering it would turn a CGL policy into a performance bond. Kvaerner decision

Which exclusions apply?

Several CGL exclusions address damage to or arising from the insured’s own work, including these three. ISO CGL form

• Exclusion j(5) removes damage to the particular part of real property on which the insured or its subcontractors are working, if the damage arises out of that work.
• Exclusion j(6) removes the particular part of any property that must be repaired because the insured’s work was performed incorrectly on it. It does not apply to damage within the products completed operations hazard.
• Exclusion l removes damage to the insured’s own completed work arising out of that work. It does not apply if a subcontractor did the damaged work or the work that caused the damage.

The products completed operations hazard covers damage that occurs after the work is complete. The form treats work as complete at the earliest of three points. The first is when all the work called for in the contract is done, and the second is when all the work at the site is done. The third is when part of the work is put to its intended use by anyone other than another contractor on the same project. Work that needs correction but is otherwise complete counts as completed. On a phased campus, a data hall in use can therefore be completed work while the rest of the site is still under construction.

Insurers began offering the subcontractor exception in 1976 through a broad form property damage endorsement, then wrote it into the standard CGL form in 1986. Most courts that have addressed the exception apply it to cover a general contractor for damage to its own completed work when a subcontractor did the faulty work. IRMI subcontractor article ISO endorsement CG 22 94 removes the exception by replacing exclusion l with a version that has no subcontractor exception. ISO endorsement CG 22 94

Courts also differ on exclusion j(5). The AGC paper notes that some courts, including appeals courts in Georgia and Massachusetts, treat the particular part as the general contractor’s entire scope of work. That reading can remove a general contractor’s coverage for almost any property damage arising from its own or its subcontractors’ operations. AGC data center paper

The contractual liability exclusion can be narrower than an insurer argues. In Ewing Construction v. Amerisure, the Texas Supreme Court held that a general contractor that promises to build in a good and workmanlike manner, without more, does not assume liability under that exclusion. The case involved tennis courts that cracked and flaked soon after they were built for a Texas school district. The exclusion applies only when a contract makes the contractor liable for more than general law would. Ewing v. Amerisure

Does the insurer have to defend?

The duty to defend is separate from the duty to pay. In Texas, courts apply the eight corners rule, comparing the facts alleged in the complaint with the words of the policy, and any doubt is resolved in favor of the insured. Ewing v. Amerisure Pennsylvania treats the duty to defend as broader than the duty to pay and also decides it from the complaint alone. In Kvaerner, an intermediate appellate court had relied on expert reports saying heavy rain may have caused the damage, and the Pennsylvania Supreme Court held that looking beyond the complaint was error. Kvaerner decision In both states, the way the owner’s complaint describes the damage can decide whether the contractor receives a defense.

Which policy years respond?

Defect damage often develops over years, so several policy years may be involved. Mycon General Contractors, a Texas contractor, built a corporate center in McKinney, Texas, in 2013 and 2014. Mycon filed suit against its insurers in April 2026. According to that suit, cracks appeared in 2016, stone veneer had fallen by February 2021, and large areas of the facade failed in March 2024, when the owner sued. Mycon says it had continuous CGL coverage from December 2013 through 2025 with six insurers, each at $1 million per occurrence and $2 million aggregate. All six allegedly denied coverage, mainly on the ground that the damage fell outside their policy periods. One insurer allegedly defended for a time and then withdrew in April 2025. Insurance Business report No court had ruled on the merits when the suit was reported.

Courts use different tests to decide which policy years apply, and Rimkus summarizes them. Under the injury in fact test, the year when physical injury first occurred controls. The manifestation test looks to when the damage became reasonably apparent. The continuous trigger may reach every policy in force while the damage progressed. Some states then divide the loss among the triggered policies by time on risk, while others may let the insured collect the whole loss from any triggered policy. Rimkus forensic article

What about servers and data?

Tenant equipment raises separate CGL issues. The AGC paper notes that electronic data is generally not tangible property, and most CGL policies contain an electronic data exclusion. Tenant servers and racks are likely trade fixtures, which the law treats as the tenant’s personal property. As personal property, the servers and racks may fall under exclusion j(4), which removes coverage for damage to personal property in the insured’s care, custody or control. AGC data center paper

Can the insurer that paid sue the contractor or the designer?

Subrogation lets an insurer that paid a claim take over its insured’s rights and sue whoever caused the loss. On construction projects, waivers of subrogation in the contract and the rule that an insurer cannot sue its own insured usually protect the contractor and its subcontractors. Designers and equipment manufacturers are more likely to be sued.

How subrogation works

A 2024 Illinois Supreme Court decision shows how subrogation works. Zurich wrote builder’s risk coverage for a new academic building for City Colleges of Chicago. On August 17, 2015, before the stormwater system was fully connected, a storm flooded the basement and damaged the building and its equipment. Zurich paid the general contractor, a joint venture, almost $3 million, and the contractor made the repairs. Zurich then sued the civil engineer that had designed the stormwater system for breach of contract, asserting City Colleges’ rights. Zurich v. Infrastructure Engineering

The engineer argued that City Colleges lost nothing and received nothing, and the court disagreed. City Colleges owned a damaged building, and the policy made the contractor City Colleges’ agent for receiving claim payments, so City Colleges was paid through its agent. The court added that even when subrogation rights are written into a policy, the insurer must pay its insured before it can sue.

Waivers of subrogation in the contract

Construction contracts often waive subrogation rights before any loss happens. The A201 general conditions published by the American Institute of Architects, or AIA, have included a mutual waiver of subrogation since the 1958 edition. Under that waiver, the owner and contractor waive claims against each other and their subcontractors for losses covered by property insurance. According to the AIA, a Louisiana appeals court enforced the waiver in 2022 after a fire during the restoration of a historic car dealership in New Orleans. The ruling barred claims by the owner and its insurers. AIA Contract Documents

A 2021 federal decision from Connecticut shows how broadly the AIA waiver can apply. During a roof replacement at a Stamford condominium, a worker reportedly punched through a drain while trying to clear it, and the property insurer paid $80,000 for the water damage. The court held that the waiver barred the insurer’s suit against the roofer and its subcontractor. The AIA waiver reached losses covered by the project insurance and by separate property insurance on the site. The court noted that most courts now apply the waiver to any insured loss, and it declined to follow an older New York decision on an earlier AIA form. The court also refused to exclude damage from work said to be outside the contract’s scope. CAUA v. Restoration Specialties

The insurance policy must also permit the waiver. The Zurich builders risk form lets the insured waive its rights in writing before a loss. After a loss, the insured may waive rights in writing only against another insured or against a business that the insured owns or controls or that owns or controls the insured. Otherwise the insured must do nothing after a loss to impair the insurer’s rights. Zurich builders risk form My guide to key terms in an AI data center construction contract covers how these waivers are drafted.

The rule that an insurer cannot sue its own insured

Under the antisubrogation rule, an insurer may not sue its own insured or a coinsured to recover what it paid. The Zurich policy in the Illinois case included that rule. The policy barred subrogation against any named insured or additional named insured. The additional named insureds included contractors and subcontractors of every tier, where a contract required it and only as their interests may appear. Zurich v. Infrastructure Engineering

The Illinois Supreme Court noted an earlier Illinois appellate decision, Chubb Insurance v. DeChambre, which held that a builder’s risk insurer could not sue a subcontractor that was an additional insured under the policy. The court also noted that courts are divided on how far coinsured status protects a negligent contractor. The engineer in the City Colleges case did not raise the antisubrogation rule, so the court did not decide how the rule applied.

Designers and manufacturers

Designers may not be protected by either rule. The Zurich policy kept the insurer’s right to pursue the insured’s unwaived claims against any third party architect or engineer for professional errors, whether or not the designer was named as an insured. The policy also limited architects’ and engineers’ status as insureds to their activities on site. The owner’s contract with the architect had no waiver of subrogation. The engineer’s subcontract made City Colleges a third party beneficiary, which gave City Colleges, and therefore Zurich, a contract claim. Zurich v. Infrastructure Engineering

Intact’s testing extension expressly keeps the insurer’s rights against manufacturers of equipment that breaks down during testing, even manufacturers named as additional insureds. Intact testing extension

How is a delay in start up loss proved?

The owner must show that insured physical damage, and not some other cause, delayed the opening past the scheduled date. The owner must also prove how long that delay lasted and how much revenue or debt service it cost. Most disputes concern the length of the delay and uninsured causes of delay that ran at the same time.

What triggers the coverage

Swiss Re’s guide to delay in start up insurance explains the basics. The coverage pays the project owner’s lost gross profit when physical damage from an insured peril, during the policy period, delays the scheduled start of business. Only the owner is insured, because only the owner earns the revenue, and lenders are usually protected as loss payees rather than as named insureds. Swiss Re DSU guide

Delay in start up coverage treats the delay as a single event. There is one scheduled start date, one delay and one deductible, however many accidents contribute to the delay. Once triggered, the indemnity period runs without a break and cannot be reinstated. The deductible is usually a time excess of 30 to 90 days, meaning the owner bears the first part of the delay. Swiss Re DSU guide The University of California’s risk services office calls 30 days the industry standard on large projects. UC risk services memo

Measuring the delay

Vertex, a construction consulting firm, distinguishes two periods that are easy to confuse. The period of restoration is the time needed to make the repairs. The period of delay is how much later operations actually started, measured from the date they would have started without the loss. Repairs delay completion only if they are on the critical path, which is the chain of tasks that sets the earliest finish date. Vertex delay analysis

Policies rarely specify a method for measuring delay. Vertex notes that policy language about earnings that would have been received but for the delay fits a collapsed as built analysis. That method takes the actual schedule and removes the loss and its effects to show when the project would otherwise have finished. The method needs a detailed as built schedule with logic links, which projects rarely keep, so an analysis of the schedule in time windows may be used instead. With either method, the analyst must account for concurrent delays and for pacing, meaning a contractor slowing other work because the repair now controls the finish date.

Swiss Re says the insurer should receive regular progress reports, and that when uninsured events slow the job, the scheduled start date should be moved back by agreement. Swiss Re DSU guide The Risk & Insurance column makes a similar point from the owner’s side, recommending a clean baseline schedule that separates the covered delay from delays already in the job. Risk and Insurance column

When insured and uninsured delays overlap

Swiss Re describes a case in which an uninsured inherent defect must be fixed in one unit while another unit needs repair after insured physical damage. Swiss Re DSU guide

1. If fixing the defect and repairing the damage take the same time, the defect sets the earliest finish, and nothing is paid.
2. If the repair takes longer, the insured delay is the extra time the repair adds beyond the defect fix.
3. If the damage happened first and the defect was found later, the full repair time counts, but not the added time to fix the defect.

What the policy will not pay

Swiss Re lists common delay in start up exclusions, including delay caused by a lack of funds to make repairs, by alterations or improvements, and by fixing defects after the event. Liquidated damages, fines and penalties are also excluded. Extra costs spent to shorten the delay, called increased cost of working, are covered with the insurer’s consent and only up to the amount of loss they avoid. The coverage ends when business actually starts, which can be when the facility is first able to earn revenue, even before formal acceptance. Swiss Re DSU guide

Worked examples

The University of California’s risk services office gives two worked examples for a medical center project. In the first example, a subcontractor knocks off a sprinkler cap a month before completion, and the water causes about $6 million of damage and four extra months of work. With $60 million of yearly gross earnings scheduled and a 30 day deductible, the recovery is about $15,000,000. In the second example, an electrical fire in the central plant causes about $5 million of damage but delays the whole project eleven months, because the plant is on the critical path. With $29 million of yearly debt service scheduled, the recovery is about $24,166,667. UC risk services memo

Delay values on data center projects are far larger. Zurich says delay in start up values of $300 million to $600 million are common, and Zurich has seen one request of about $2 billion. Underwriters add the full delay value to their estimate of the largest likely loss, which reduces the share of a project any one insurer will take. Zurich claims podcast Marsh’s builder’s risk leader told ENR that limits of $8 billion to $9 billion or more can be placed without delay coverage, but that capacity falls once delay coverage is added. Lost rent on a hyperscale campus can almost equal the construction cost. ENR insurance report My guide to schedule, delays and liquidated damages covers delay damages under the construction contract.

How does the insurance claim relate to the owner’s contract claims?

The owner can claim under its insurance and, at the same time, pursue contract and warranty claims against the contractor and design claims against the designer. Insurance pays covered loss, while the contract claims can recover what insurance does not cover, such as the cost to redo faulty work. After paying, the insurer may take over the owner’s claims and pursue them itself.

What insurance leaves to the contract

The defects exclusion removes coverage for the cost of fixing the defect itself, as the Florida Supreme Court held for design defects in Swire. Florida Supreme Court opinion Builder’s risk excludes contractual liquidated damages. AGC data center paper Delay in start up insurance excludes delay caused by fixing defects. Swiss Re DSU guide The owner’s remedy for those costs is its contract with the party that did the work.

The waiver of subrogation also affects those contract claims. In the Connecticut case, the AIA waiver applied to losses to the extent property insurance covered them. CAUA v. Restoration Specialties Under that wording, the owner keeps its claims for losses that the insurance does not cover. My guide to warranty and construction defect claims for AI data centers covers those claims.

Claims against the designer

Claims against designers depend on state law. Under the economic loss rule, some states bar an owner’s negligence claim against its own designer for purely financial loss. Hawaii and Arizona do so, and Arizona applied the rule to an architect whose apartment design failed to meet HUD requirements. Other states, including Florida, Alaska and Nebraska, allow negligence claims against design professionals. ABA forum blog The Illinois City Colleges case shows the contract route instead, with the insurer suing the engineer as the owner’s subrogee for breach of a design contract. Zurich v. Infrastructure Engineering

Keeping the contract claims from harming the insurance claim

What the insured does in its contract claims can harm its insurance claim. The CGL form requires the insured, at the insurer’s request, to help the insurer enforce rights against others who may be liable. The form also bars voluntary payments without the insurer’s consent, except at the insured’s own cost. ISO CGL form The Zurich builders risk form forbids the insured from doing anything after a loss that impairs the insurer’s recovery rights. The only exception after a loss is a written waiver in favor of another insured or an affiliated business. Zurich builders risk form A settlement or release signed with a contractor or designer without the insurer’s agreement can therefore cost the insured its coverage.

The claims may also proceed in different forums. In the Mycon matter, the owner’s defect suit was in a Texas state court while the contractor sued its six CGL insurers in federal court. Insurance Business report Disputes on AI data center projects also go to arbitration. A 2026 arbitration over a $500 million AI factory in Kansas City revealed a project months behind schedule and hundreds of millions of dollars over budget. Lambda had loaned more than $220 million to keep the project going. Kansas City Business Journal

Key takeaways

• Give notice under every policy that might respond, including builder’s risk, CGL, professional liability and delay in start up, as soon as a defect causes damage. Some states let insurers deny late claims without showing harm.
• Do not start permanent repairs before the insurers and other likely parties have had a chance to inspect. Premature repairs can lead to spoliation disputes and weaken the evidence.
• Track the cost of fixing the faulty work separately from the cost of repairing resulting damage. Under most defects clauses, only the cost of repairing resulting damage is covered.
• Read the defects clause before the loss. LEG 3 restores more coverage than LEG 2, and LEG 2 more than LEG 1, and a federal court has construed LEG 3 wording against the insurer when the wording was ambiguous.
• Check whether the builder’s risk policy has a testing and commissioning extension. Without that extension, the mechanical breakdown and electrical current exclusions apply to many commissioning losses.
• Match the builder’s risk end date to the date the operating policy begins. A 72 hour or 168 hour testing requirement can leave a gap at handover on a phased campus.
• Expect CGL coverage for faulty work to depend on the state, the subcontractor exception and whether the insurer added endorsement CG 22 94.
• Review waivers of subrogation in every contract, including design contracts. The waivers determine whom the insurer can sue after it pays.
• Keep a clean baseline schedule and regular progress reports. A delay in start up claim depends on proving the critical path delay and separating it from uninsured delays.
• Before signing any settlement or release with a contractor or designer, get the insurer’s consent.

Frequently asked questions

Q:How are construction defect insurance claims on AI data centers investigated and litigated?

A:Forensic engineers investigate the loss and coordinate with cost and scheduling experts. The engineers determine when the damage occurred, trace its cause and assess whether a damaged component should be repaired or replaced. Envista forensic article On large data center losses, Zurich sends experts on both the financial loss and the physical damage. Zurich claims podcast If a builder’s risk claim is denied, the dispute often concerns the defects exclusion and its ensuing loss wording. AGC data center paper If a CGL claim is denied, the dispute often concerns the occurrence requirement and the your work exclusion. Expert opinions must meet Federal Rule of Evidence 702 in federal court. Rimkus forensic article

Q:Does builder’s risk insurance pay to fix defective work?

A:Usually not for the defective part itself. The standard ISO exclusion removes coverage for loss caused by faulty design, workmanship or materials, but the policy pays for loss from a covered cause that results. ISO special causes form A LEG 3 clause provides broader coverage. LEG 3 excludes only the cost of improving on the original design, materials or workmanship, so it can pay to replace a damaged defective part. Construction Executive analysis

Q:What is the difference between LEG 2 and LEG 3?

A:LEG 2 pays for damage to other covered property, minus what it would have cost to fix the defect just before the damage happened. LEG 3 also pays for damage to the defective part and the cost to reach it, excluding only improvements. In Lockton’s example of a $3 million fire, LEG 2 paid $2,860,000 and LEG 3 paid $3,325,000. Construction Executive analysis

Q:Is faulty workmanship an occurrence under a CGL policy?

A:It depends on the state. Florida and Texas hold that unintended faulty work can be an occurrence. J.S.U.B. decision, Houston Lawyer article Ohio and Pennsylvania hold that it is not. Ohio Northern decision, Kvaerner decision Even where faulty work is an occurrence, the cost to repair the faulty work itself is generally not property damage. Pozzi Window decision

Q:Does builder’s risk cover equipment that breaks during commissioning?

A:Often not under standard wording. The ISO special form and the Zurich builders risk form both exclude mechanical breakdown and artificially generated electrical current. ISO special causes form, Zurich builders risk form A testing and commissioning extension can restore the coverage for cold testing, hot testing and commissioning, for up to a set number of days. Intact testing extension

Q:Can the builder’s risk insurer sue the contractor after paying a claim?

A:Usually not. Contracts based on AIA forms contain mutual waivers of subrogation for losses covered by property insurance, and courts enforce those waivers. CAUA v. Restoration Specialties Contractors are also often insureds under the builder’s risk policy, and an insurer cannot sue its own insured. A designer whose contract has no waiver can be sued, as the Illinois Supreme Court allowed in 2024. Zurich v. Infrastructure Engineering

Q:What happens if I give notice of the loss late?

A:The answer depends on the state. Some states treat timely notice as a strict condition. Florida presumes the insurer was harmed and makes the insured prove otherwise. A growing number of courts require the insurer to prove actual prejudice before denying. Law firm analysis Separately, the ISO builders risk form requires a sworn proof of loss within 60 days after the insurer asks. ISO builders risk form

Q:How do I prove a delay in start up loss?

A:Show that insured physical damage delayed the critical path, measure the delay against the scheduled start date, and prove the lost income. The period of delay is not necessarily the same as the repair time, and repairs off the critical path may not delay opening at all. Vertex delay analysis Delay caused by fixing a defect, a lack of funds or changes in scope is excluded, and a single time deductible, often 30 to 90 days, applies first. Swiss Re DSU guide

Q:Who pays when moisture voids a manufacturer’s warranty on new equipment?

A:Often the policy does not pay, and moisture exclusions may bar recovery even where the equipment is damaged. The AGC paper notes that many builder’s risk policies do not treat a voided warranty alone as direct physical damage. AGC data center paper When moisture does reach the equipment, the dispute becomes whether cleaning is enough or replacement is needed, and manufacturer guidance can support the case for replacement. Risk and Insurance column