Data Center Expansion Raises D&O Disclosure and Oversight Risks

The financial exposure surrounding the AI data center boom is starting to look less like a permitting issue and more like a test of corporate disclosure and board oversight. Companies are committing substantial capital to projects whose costs, capacity and timelines can change as governments, utilities and communities respond to rapid growth. When those changes collide with earlier projections, directors and officers may face claims that investors weren’t given an accurate picture of the risks.

The pressure comes from a regulatory environment that varies by location and continues to evolve. There is no federal framework governing data center development, leaving companies to navigate different state and local requirements. A project that looks economically attractive when approved may carry a different cost profile by the time it is ready to operate.

Growth meets local constraints

Recent actions show how quickly project conditions can shift. In July, New York temporarily paused environmental permitting for some new hyperscale data centers for up to a year. The pause gives the state time to develop a framework addressing energy costs, environmental effects and community benefits.

Pennsylvania imposed new requirements on data center developers in August, including standards concerning energy affordability and environmental protection. The state also requires local approval before issuing permits. Elsewhere, local governments have adopted or considered restrictions in response to electricity demand, water use, noise and land use. Residents and environmental advocates have also increasingly opposed new projects.

Even states commonly viewed as receptive to technology investment are setting conditions. Virginia adopted site-assessment requirements for certain facilities with high energy use. State regulators have also required data centers to pay for transmission infrastructure built exclusively to serve them.

Texas has established requirements for connecting large loads to the electric grid, including provisions concerning infrastructure costs and reliability. In August, Gov. Greg Abbott directed state regulators to audit data centers seeking grid connections before those projects could proceed.

These developments don’t mean every project will face a delay or a new cost. They do mean that power access, water availability, permitting, local support and infrastructure spending can materially affect the assumptions behind a major investment. Tax incentives and political support can also change, adding further uncertainty to projected returns.

Where project risk becomes disclosure risk

For public companies, the immediate challenge is keeping investor communications aligned with operating conditions. Disclosures may cover permitting, power availability, construction schedules, financing needs and the likelihood that planned capacity will come online on time. Those statements can become vulnerable when new information changes the underlying assumptions.

A company might describe a project accurately at announcement, then encounter a utility constraint, a revised regulatory requirement or community opposition. Once management knows that a development could materially affect expected capacity, timing, costs or revenue, the company’s disclosure process needs to account for it. The central question for a later claim may be whether investors received a fair account of what management knew and how the new information affected earlier projections.

Recent securities cases illustrate the allegations that can follow when infrastructure performance and reported expectations diverge. In Masaitis v. CoreWeave, Inc. (D.N.J. filed Jan. 12, 2026), plaintiffs alleged that investors were misled about delays affecting a Texas data center cluster and CoreWeave’s ability to meet customer demand. CoreWeave says the allegations are meritless; the case remains in litigation. The dispute illustrates how construction delays or capacity shortfalls can become the basis for disclosure claims if they affect expected revenue or growth.

Uniformed Sanitationmen’s Ass’n Compensation Accrual Fund v. Equinix, Inc. (N.D. Cal. Jan. 6, 2025) involved allegations that Equinix oversold power capacity without disclosing the issue to investors. A federal court dismissed the plaintiffs’ power-capacity disclosure theory because they hadn’t adequately alleged materiality. The court allowed a separate theory concerning reported financial metrics to proceed.

Applied Digital and certain executives have also faced allegations, disclosed in the company’s 2026 Form 10-K, concerning statements about the profitability of its data center hosting business and its ability to transition to a low-cost cloud-services provider. The allegations in these cases don’t establish that the companies acted wrongfully. They do show the kinds of claims that can arise when statements about capacity, profitability or growth are tested against operating results.

Board oversight and insurance boundaries

Oversight claims may focus on what directors knew about a project’s economics and how they responded to warning signs. Boards approving large data center commitments need a clear view of the factors that could change costs, capacity or returns: electricity prices, access to power and water, the durability of tax incentives and the potential for local opposition to delay construction.

Directors can’t be expected to predict every policy shift. If a project falters, however, plaintiffs may examine what information reached the board, how risks were discussed and whether directors acted on material changes to the original assumptions. Regular reporting can help establish how the company monitored a project as conditions changed.

D&O insurance generally doesn’t cover the physical performance of a data center. The management liability exposure arises when an operational or regulatory problem leads to allegations of misleading disclosure, inadequate oversight or another governance failure. Coverage depends on the policy wording and the claim, so a data center loss won’t automatically fall within a single insurance category.

For underwriters, relevant factors include the geographic concentration of a company’s data center investments, reliance on utility service and regulatory approvals, power and water requirements, dependence on government incentives, and board oversight of major infrastructure commitments. Risk managers can use the same information to identify how an operational setback could create management liability exposure and whether the insurance program addresses that scenario.

Keep reporting tied to project conditions

Boards should receive recurring updates on material projects, including permitting, power and water access, community opposition, construction progress, financing, tax incentives and changes to projected economics. Companies also need clear escalation procedures for significant shifts in the assumptions behind a project.

Investor disclosures should draw on current information from the teams managing construction, utility relationships, permitting and regulatory matters. When management discusses expected capacity, completion dates, costs or revenue, those claims should reflect the latest available operating facts. Insurance reviews can also map potential loss scenarios across the company’s coverage and identify provisions that may leave gaps.

The key exposure isn’t that every data center will encounter a pause or a lawsuit. It’s that large financial commitments depend on conditions that are shifting across markets. Companies that keep board reporting, external disclosures and insurance planning connected to those changing conditions will be better placed to explain how project economics have evolved.

Patrick M. Kennell is co-managing partner of Kaufman Dolowich’s New York office. Kristen S. Swift is managing partner of the firm’s Delaware office. Both defend directors, officers and corporations, and handle insurance coverage matters.