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Canada’s data centre boom: Managing construction risk while seizing opportunity

Explore Canada’s data centre boom, AI investments, and key risk management strategies to seize project opportunities while managing construction and insurance challenges.

Prime Minister Mark Carney’s message has been clear: Canada is now all in on the artificial intelligence (AI) drive, reinforcing its commitment to digital sovereignty with a recent request for proposal for government-backed AI data centres with capabilities of over 100 megawatts. Cloud service providers are also driving demand, with Microsoft committing to an AI investment of $19 billion between 2023 and 2027, including more than $7.5 billion in the next few years.

Data centre contractors and developers planning to work with the government on such schemes or in the growing Canadian private sector should be aware of the risks at play. With data centre growth comes immense opportunity, but project stakeholders must also navigate physical and contractual risk factors that can impact project timelines, costs, and coverage. Below are some key considerations when negotiating construction contracts and finance agreements, as well as when designing and placing a project insurance program.

A closer look at the Canadian risk and regulatory landscape

For data centre developers or operators, Canada offers natural advantages in key areas such as power, land, and demand. Grid access offers cloud providers, known as hyperscalers, and other tenants diverse power sources, which can mitigate electricity failure risk across the country. It also serves as a favourable location for hyperscalers committed to sustainability initiatives, given that over 60% of the national electricity comes from hydropower.

Alberta highlights its own natural resources in oil and power, cold climate, low corporate tax rates, and regulatory environment as reasons to invest in the province, while established hubs already exist in Ontario and Quebec. However, pressure has intensified in some provinces to distribute the burden imposed by power-demanding data centres on the public grid, and requirements are evolving.

In certain territories, permits for grid access have taken as long as years to obtain, reflecting growing public concerns over energy consumption. Policy varies across Canada, with British Columbia limiting grid permits while Alberta actively seeks out data centre investment. Power generation also comes with its own considerations.

These regulatory and infrastructure dynamics have direct implications for risk management and insurance strategies. The reliance on diverse and sometimes constrained power sources underscores the importance of robust contingency planning, especially as data centres increasingly invest in onsite power generation and battery storage to mitigate outages. Given the critical role of power availability in operational continuity, insurance programs must be carefully tailored to address potential gaps during phased project handovers — from construction to operations — to avoid exposure to construction-related damage or contractual breaches.

Additionally, natural catastrophe (Nat Cat) risks such as floods, wildfires, and earthquakes vary across provinces, influencing site selection and insurance availability. The evolving regulatory landscape, combined with the physical risks associated with power infrastructure and emerging technologies, necessitates early and proactive risk strategies.

Three key considerations for Canadian developers and operators

Canadian data centre projects involve distinct challenges that require careful risk management and risk transfer strategies to protect investments and support timely execution. Key considerations include managing contractual insurance complexities, securing design and defect coverage to address potential liabilities, and protecting against physical risks, like Nat Cat events, for construction and equipment. Consider the following three risk categories:

1. Contractual

Data centre construction projects typically involve multiple stakeholders and general contractors, even for a single project. Separate contracts may exist for elements such as:

Power generation
Shell and core construction
Mechanical and electrical system installation
Final server installations

The insurance and indemnity provisions within these various contracts may vary, making it critical to have an experienced insurance advisor review their interplay before contract execution. This review can help prevent agreeing to burdensome or costly obligations that could expose you to unnecessary risk.

Additionally, many Canadian data centre projects include at least one party based in the US. Therefore, it is important to establish and clarify insurance, liability, and indemnity provisions early in the contractual process to ensure alignment with Canadian customs. Key territorial differences to consider include professional and design liability, wrap-up liability, Nat Cat insurance limits, and contractual risk allocation norms, which can vary significantly between Canada, the US, and other jurisdictions.

Lenders frequently require project owners to secure standalone project insurance policies, a requirement that conflicts with the default positions found in many standard construction contracts — both international and Canadian. To avoid delays and protracted negotiations, construction contracts and project coverage should be structured from the outset with these lender expectations in mind. For projects financed through non-recourse loans, lenders often impose stringent insurance conditions, including the mandatory procurement of delay in start-up (DSU) insurance. These requirements necessitate careful negotiation and explanation to insurers to ensure comprehensive coverage. Given the potentially significant revenue generated by data centres, it is critical that DSU cover reflects not only the financial impact of damage-related delays on your revenue or debt servicing, but also commitments to any lending parties involved.

2. Design and defects

Design failures can significantly impact schedules and costs during construction and beyond. These situations can be sensitive due to serious financial repercussions for owners if customer contracts include pre-agreed ready-for-service (RFS) dates, which typically offer limited contractual relief for delays.

In Canada, design professional liability insurance operates differently to many other territories and is often procured under a single project professional indemnity policy. Understanding this cover, including the terms, conditions and limits available in Canada, can be a vital tool during early negotiations, regardless of the contractual structure.

Additionally, defects coverage within builders risk policies is often required by contractors onsite in Canada and should be included in the project insurance program. For elements of works associated with data centre projects, London Engineering Group (LEG-3) or Defect Exclusion (DE-5) provide extensive protection for defects in design, materials, or workmanship.

Owners planning to invest or operate in Canada should discuss these coverages with their risk advisor before work begins to secure appropriate solutions.

3. Physical

Regardless of the data centre model — whether large-scale hyperscale facilities, shared co-location spaces, edge data centres closer to end-users, or enterprise-specific centres — there is a common expectation for rapid construction and deployment. The urgency to commence operations often results in phased handovers, allowing data centres to become operational before the project is fully complete. Such phased handovers, especially involving lenders and external customers, require a considered insurance procurement approach to allow for a seamless coverage transition from construction to operations, avoiding gaps that could expose operational areas to construction-related damage or contractual breaches.

Investment in onsite power generation and battery storage facilities is growing, but specialized critical equipment losses and failures can have significant effects on construction schedules. Establishing contingency within supply agreements and onsite quality controls is crucial to mitigating risk, especially given the consequences of outages or power unavailability as handovers near within the schedule. The dependency of power and energy centres on revenue generation should be understood to tailor coverage appropriately within the overall project insurance program. Nat Cat exposures can vary across Canadian provinces, meaning site selection should take these region-specific challenges into account.

Proactively engaging with insurers early in the process to communicate comprehensive risk management strategies, from the design stage through contractor installation, can significantly improve both the scope of coverage and pricing for these projects.

Balancing innovation and risk to meet data centre demand

Addressing the demand for new digital infrastructure and managing risk throughout the construction phase is crucial to seize the AI opportunity in Canada. However, developers and operators need to be prepared with robust risk management and adequate insurance coverage to protect investments and execute projects efficiently.

Experienced advisors from Marsh Risk Canada can help you navigate these challenges and develop customized insurance programs specific to your project needs. Marsh Risk’s Nimbus insurance solution is designed to enhance business resilience and streamline coverage at every stage of the project lifecycle, from planning and construction to completion and handover, so you can focus on scaling rapidly and effectively.

To learn more about how to protect your project and build data centre resilience, speak with a Marsh Risk advisor.

Construction team collaborates on building plans inside site

Article

Canada’s data centre boom: Managing construction risk while seizing opportunity

A closer look at the Canadian risk and regulatory landscape