It's very common for colocation providers to require insurance. All of the ones that we deal with do. It's to protect them in case your equipment causes a fire or injuries.
In the US, the kind of insurance you need is called General Liability. Your colo provider may require Umbrella coverage as well. A General Liability policy is cheap compared to things like E&O (Errors and Omissions).
We deal with a lot of smaller companies or individuals, thus we do not require insurance, but our terms of service still highly recommends insurance, as you would still be held liable for any damages done by you, your staff, or your equipment. I am pretty sure that is standard language as well, so to protect your overall business and your own personal finances, I would highly recommend you carry that insurance whether it is required or not. It isn't really all that expensive, a couple hundred dollars a year should cover it in most cases.