Hyperscale data centers have emerged as one of the most sought-after asset classes for institutional investors and asset managers. The acquisition of stabilized facilities is doubly attractive because, in a single deal, they provide both real estate and technology exposure. Data center clients tend to be blue chip, but even the most secure tenancies in highly desirable locations come with a critical operational risk: potential penalties and termination clauses under strict service level agreements (SLAs).

These performance guarantees for tenants are triggered by downtime, and given the negotiating power of the major data center occupiers, they can materially affect financial performance. Investors and capital providers are increasingly turning to SLA insurance to remove the risk.
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Downtime risk is a direct threat to NOI and IRR

Data center downtime can directly impact net operational income and internal rates of return because of the financial penalties typically built into the tenancy agreements. Almost all hyperscale leases include a strict SLA. Typically, they trigger a penalty when availability falls below 99.9 percent, sometimes even 99.99 percent. Even a brief slip below the specified level can result in:

• Service credits of up to 200 percent of the monthly rent
• A decline of up to 40 percent of annual net operating income
• Early termination rights for tenants

For investors who purchase these assets as stable, income-generating infrastructure, SLA liabilities create genuine and significant downside volatility. The penalties can have a material impact on cash flows, jeopardizing asset stability. Even Tier III and Tier IV-rated facilities are not immune, as recent, high-profile incidents show.

A hardware failure at a data center leased by Alaska Airlines disrupted operations and caused them to ground their entire fleet of planes for around three hours in July 2025. The incident is a clear example that even high-availability environments can fail, costing tens of millions and disrupting mission-critical systems.

In May 2025, a battery fire at a data center in Oregon caused a prolonged, global outage of the X (formerly Twitter) social media platform. The event shows that even hyperscaler environments face infrastructure risk that could trigger SLA penalties, as well as reputational damage to clients and operators alike.
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SLA insurance to the rescue

To mitigate exposure to data center performance SLA liabilities, institutional buyers now require SLA insurance as part of M&A and refinancing deals. The coverage underpins the transaction in the same way that mortgage insurance removes risk from a residential real estate deal.

Traditional insurance policies that are normally required in these transactions, such as property, E&O, or cyber coverage, do not provide adequate protection against this risk. They are not built to address contractual liabilities or service credits and often explicitly exclude them, leaving a significant gap that can directly impact cash flow and asset value.

SLA insurance is designed to address this gap. It’s based on predefined parameters that mirror the SLA terms in a lease. When performance drops below the agreed performance threshold, the insurance automatically triggers the claims payout. The claim under this payment can be used to cover SLA penalties, revenue loss, lease termination, and other direct and indirect expenses. The immediate liquidity ensures the expected net operating income is maintained, preserving the original investment assumptions and protecting the internal rate of return.

By turning performance-based liabilities into predictable, insurable outcomes, SLA insurance reduces discount rates, improves financing terms, and increases buyer confidence. In competitive capital markets, this means an insured data center can be positioned as a more attractive, stable, and financeable asset.
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A closing condition

Asset managers, pension funds, and infrastructure platforms are increasingly making SLA insurance a standard closing condition. In recent transactions, investors have required sellers to show proof of coverage, or to incorporate SLA insurance into the purchase structure. Without it, deals are often repriced, delayed, or rejected.

SLA insurance for data centers has quickly become a baseline requirement to make hyperscale assets investable, financeable, and tradable. For investors, it protects IRR and removes cash flow uncertainty. For lenders, it supports larger and cheaper debt facilities. For operators and sellers, it unlocks liquidity and drives premium valuations.

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Originally published on DatacenterDynamics