Joint Ventures…What Did I Agree To?

Company A is a mid-sized general contractor that has an opportunity to bid on a large military barracks—its largest project ever. The size of the project 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 is formed.

Both companies A and 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 let its insurance lapse. Shortly after that Company B filed for bankruptcy.

The joint ventures client doesn’t care that Company B has gone out of business—it just wants to recover damages and is looking to the joint venture and the remaining solvent member, Company A, to pay on the claims. Company A has done nothing wrong; how can it possibly be held responsible for Company B's actions? Unfortunately, Company A did not understand the concept of “joint and several liability,” but quickly learns what that means.

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 which company causes them. To make matters worse for Company A, this is likely not covered by its general liability insurance policy. Company A’s general liability covers its legal liability arising out of its own operations, but it doesn’t cover liability arising out of Company B’s operations. Since the joint venture isn’t a "named insured" on the policy, and since Company A didn’t make the mistake, Company A’s 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 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 joint venture can be ongoing, many are formed for a specific purpose or project. Each member of the joint venture has an equity stake in the entity and profits are shared according to a pre-agreed upon formula. Generally, one of the joint venture stakeholders is designated the managing member and is responsible for making final business decisions. So what is the best way to insure participation in a joint venture?

Three Options for Insuring a Joint Venture

Option 1. Each member of the joint venture insures its own exposures. If a company subcontracts to the joint venture, no endorsement is needed on the policy. If a contractor performs work as “part of” the joint venture, it needs to make sure its policy covers this. While this is the easiest route, it can create big problems as evidenced above. Each members' liability policy only provides coverage for losses caused by the named insured's 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 its 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 its loss history and would affect future premiums, as well as, possibly, its 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 joint venture and not the individual members;
• losses will not affect the limits provided to the joint venture members under their respective policies;
• claims are handled by one insurer rather than several if each joint venture member retains their own insurance; and
• some clients of the joint venture may request a Certificate of Insurance that lists the joint venture, and this is the easiest way to provide that.

Dissolution of the Joint Venture

Joint ventures rarely run into perpetuity. When a joint venture is shut down, the completed operations exposure must be considered. A construction project might be insured under a controlled insurance program (owner or contractor OCIP or CCIP) that usually takes the coverage out through the statute of repose. If the project is not written on an OCIP or CCIP, each 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 joint venture 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 unavailable. 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.