Your First Joint Venture…what did you get yourself into?
Company A is a mid-sized General Contractor. They have an opportunity to bid on a large military barracks, it would be their largest project ever. They realize that their size may be a factor in the selection process and it is suggested that they consider a Joint Venture with another construction company. They meet and come to terms with Company B and the decision is made. The AB Joint Venture (ABJV) is formed.
Both companies A & B check with their General Liability Insurers and determine that their work for the Joint Venture is covered. Unfortunately, there is a significant claim on the project arising out of Company B’s work. Unbeknownst to Company A, Company B has let their insurance lapse. Shortly after that Company B filed bankruptcy.
The Joint Ventures client doesn’t care that Company B has gone out of business, they just want to recover their damages and they are looking to the Joint Venture and the remaining solvent member of the Joint Venture, Company A, to pay their claims. Company A has done nothing wrong…how can they possibly be held responsible for something Company B did? Unfortunately, Company A did not understand the concept of “joint and several liability.” They do after their attorney explains it to them.
In simple terms “joint and several liability” means that each Joint Venture Member is jointly and severally liable for any damages on the project regardless of who caused them. To make matters worse for Company A, this is likely not covered by their General Liability Insurance Policy. Company A’s General Liability covers them for their legal liability arising out of THEIR operations. It doesn’t cover them for their liability arising out of Company B’s operations. Since the Joint Venture isn’t a Named Insured on their policy and since Company A didn’t make the mistake, their coverage is not triggered. So, while Company A is on the hook for the damages, they may not have insurance. How did this happen?
One of the most difficult entities to understand and insure is a Joint Venture. A Joint Venture (JV) is a separate legal entity formed by the combination of two or more persons or businesses for the purpose of engaging in a specific activity or operation. While a JV can be ongoing, many are formed for a specific purpose or project. Each member of the JV has an equity stake in the entity and profits are shared according to a pre-agreed upon formula. Generally, one of the JV stakeholders is designated the Managing Member and is responsible for making final business decisions. So what is the best way to insure your participation in a Joint Venture? There are three options:
Option 1: Each member of the JV insures its own exposures. If your company subcontracts to the Joint Venture, no endorsement is needed on your policy. If you will perform your work as “part of” the Joint Venture, you will need to make sure your policy covers this. While this is the easiest route, it can create big problems as evidenced above. Each member’s liability policies only provide coverage for losses caused by the Named Insureds negligence. They don’t pick up the joint and several liability in the absence of negligence.
Option 2: One member insures the joint venture in its totality by naming it as an insured under their insurance policies. In this situation the other members will specifically exclude this work under their practice policy since it will be covered by the other party’s insurance (the insuring party). The disadvantage to the insuring party is that any losses would go on their loss history and would affect their future premiums and possibly their insurability. Insurance costs for the coverage would also need to be allocated amongst the various members.
Option 3: The Joint Venture buys its own insurance. This is the preferred way to insure a Joint Venture. While this may be the most expensive option there are some advantages.
- Loss experience is assigned to the JV and not the individual members.
- Losses will not affect the limits provided to the JV members under their respective policies.
- Claims are handled by one insurer rather than several if each JV member retained their own insurance.
- Some clients of the JV may request a Certificate of Insurance that lists the JV and this is the easiest way to provide that.
Dissolution of the Joint Venture
Joint Ventures rarely run in to perpetuity. When a JV is shut down, you have to consider the completed operations exposure. A construction project might be insured under a Controlled Insurance Program (Owner or Contractor aka OCIP or CCIP) which usually takes the coverage out through the Statute of Repose. If the project is not written on an OCIP or CCIP, each JV Member would have to add their respective exposure for their operations back to their respective insurance policies by endorsement. This may not be an option depending on the insurer. The JV could also purchase a Discontinued Operations Policy for the General Liability to address the completed operations exposure through the Statute of Repose but purchasing this on a standalone basis may be expensive or not available. Regardless, the completed operations exposure needs to be understood and addressed.
Joint Ventures may be the best way to pursue a specific project or job, however, the risk management challenges of this type of entity need to be considered. It is important to not only understand the responsibilities of each participant but also to arrange and coordinate the various insurance programs to effectively cover each member’s interest.