By LeRoy Utschig, CPCU, CLU, ARM
What is a joint venture? How can a joint venture be formed? What insurance is automatically afforded to a joint venture? Are insureds involved in joint ventures without knowing they are? Do many insureds know what a joint venture is? What insurance should be provided for a joint venture? Is it necessary to insure a joint venture after a project is completed?
What is a joint venture?
A definition of a joint venture is an entity formed by two or more legal entities doing work for profit for a specified period of time. Upon completion of the project they are working on, the joint venture will cease to exist. Around the end of the 1980s, a Wisconsin county complied with a federal court order and expanded the size of its jail. My part in this operation was that I provided the write-up recommending that a wrap-up policy be used to insure all of the contractors on the construction project.
There are two actual parts to a jail. One part is the building structure itself. The second part to a jail is the "jail" items themselves. Cells, doors locked by remote control, alarm systems, and similar items are unique features not found in most buildings. Due to this "two-item" feature, the jail was designed by two architects. One designed the building (Building Architect, Inc.) while the other designed the jail features (Jail Architect, LLC). The county did not contract with the two architectural firms. Building Architect, Inc., and Jail Architect, LLC, provided one proposal. The name on their proposal was Building Architect, Inc., and Jail Architect, LLC, A Joint Venture. These two firms knew that they were forming a joint venture and identified themselves as a joint venture. They combined their expertise for one job. It was being done for a profit. And, they would not be working together once the construction of the jail had been completed.
There were two main contractors for the job. General Construction, LTD, constructed the building while Interior Contractor, Inc., installed all of the jail-type equipment. They, too, contracted as a joint venture for the construction project. Interior Contractor, Inc., and General Construction, LTD, A Joint Venture, was the name shown on the construction contract.
The examples of the two architects and the two contractors working together serve to illustrate that joint ventures do exist and the reason(s) why some are formed. In the examples given, the parties involved knew they were forming a joint venture. Not all firms who enter into a joint venture are even aware that they are a part of a joint venture.
Local contractors--joint venture
Alan Construction was an individual. Operating in the greater Green Bay, Wisconsin area, Alan Construction did some rough carpentry work. However, his specialty was interior work such as installing hardwood flooring, redoing stairs, and building built-in knickknack shelves. Any wood that he installed that would be seen, such as trim work and hardwood flooring, was nearly flawless. He had excellent skills and took pride in doing the job perfectly.
Home Construction, Inc., was one of several divisions of Realty Management, LLC. Realty Management, LLC, had just put together a deal that was the largest in its history and had received permits to construct very expensive homes on a bluff overlooking the waterway named Green Bay. These would be individually designed homes.
As the first home designs came in for Home Construction, Inc., to begin building, they became aware that these homes would have significant amounts of exposed, finished woodwork. Home Construction, Inc., did not have a crew with the expertise to do that kind of work. Home Construction, Inc., contacted Alan Construction to ask if he would be willing to do the installation of all of the exposed wood.
The owner of Alan Construction knew of contractors like himself who went broke due to similar arrangements. The sub-contractor, such as himself, would do all of the work and then not be paid by the general contractor. The only way that Alan Construction knew of to avoid that kind of a problem was to be paid directly by the firm financing the construction. Upon discussing the situation with the financing firm, that financing firm said that it would not write two checks, one to Home Construction, Inc., and another to Alan Construction. From the financing firm's viewpoint, it would be too difficult to determine how much work would have been done by each contractor. The financing firm said that it would issue one check with the names of both contractors on it. In other words, the check would be made out to Home Construction, Inc., and Alan Construction.
Construction began and everything was going smoothly. One evening the couple for whom the house was being built stopped by to see how construction was progressing. The couple brought their children along and did not watch them. Their 10-year-old son had to investigate everything, including Alan Construction's miter saw. The boy figured out how to disable the guard. He turned the saw on, and with the 2000 sawtooth cuts per second of the spinning blade, cut off his hand.
The parents of the injured boy sued Alan Construction. Alan Construction reported the loss to his insurer. An experienced adjuster handled the claim. He knew enough to ask questions and get answers. One of the items he asked for was a copy of the contract between Alan Construction and Home Construction, Inc. He was surprised to learn that Alan Construction was not contracted to Home Construction, Inc. Rather, Alan Construction and Home Construction, Inc., were both contracted to the couple for whom the home was being built.
The adjuster also learned that checks from the financing firm were made out to both Home Construction, Inc. and Alan Construction.
After conferring with his supervisor, the adjuster contacted Alan Construction and told him that there was no coverage. Here is the clause from Insurance Services Office's (ISO) CG 00 01 01 96, Commercial General Liability Coverage Form, Section II--Who Is An Insured:
"No person or organization is an insured with respect to the conduct of any current or past partnership, joint venture or limited liability company that is not shown as a Named Insured in the Declarations."
Alan Construction was acting as part of a joint venture. It was a temporary business connection, and he expected to make money as a result of working with Home Construction, Inc.
Joint venture insurance
To provide insurance for a joint venture, write separate, minimum premium policies for the joint venture. Each party to the joint venture will maintain its own insurance just as it had prior to being part of a joint venture. These firms can still have losses apart from their joint venture activities. The following policies should be written in the name of the joint venture. All members of the joint venture should have their names shown as part of the joint venture. In this case, the name on the joint venture insurance policies would read, "Home Construction, Inc., and Alan Construction." These are the coverages that I recommend to insure the joint venture's loss exposures:
* Commercial General Liability
* Non-owned and Hired Auto
* Workers Compensation
* Commercial Umbrella
I seldom receive any questions regarding the need for commercial umbrella, non-owned and hired auto or the commercial general liability contracts. But why does the joint venture need workers compensation when each member of the joint venture already has workers compensation for its employees? The joint venture needs its own workers compensation contract to cover the exposure created by hiring a sub-contractor who is either an individual or a partnership and not covered by its own workers compensation policy. As you will recall, individuals and partners are not insured by a workers compensation contract unless they elect to be covered by their own workers compensation policy.
There is no actual rating base for the joint venture. Each of the contracts would be written for a minimum premium. If you have an underwriter who knows how to write joint ventures, go with whatever rating base he/she uses for joint ventures. About 10 years ago, I wrote on joint ventures. A reader called to ask me how to rate it as his underwriter needed some classification to show on the insurance contracts for the joint venture. Should your underwriter not know how to rate joint ventures, my recommendation today, as it was 10 years ago, is to use the classification, "contractors executive supervisors."
Prevalence of joint ventures
During the 1980s, I covered joint ventures as part of an overall commercial lines seminar held in Fort Dodge, Iowa. Attendees included individuals from a large agency that had locations in 12 different towns. At the conclusion of the joint venture part of the seminar, one of the attendees from this large agency said that none of his clients was involved in joint ventures. At this point, a knowledgeable insurance man, who also happened to be the manager for the 12 locations, turned around and said, "We are a bank-owned insurance agency. Many times, when these contractors form a joint venture, they will open a separate checking account for the joint venture work. I just realized during this presentation on joint ventures that we have many clients who are part of a joint venture and we have not been insuring them. We will be asking about and insuring joint ventures starting today."
Discontinued joint ventures
Typically the insurance for the joint venture will end upon the completion of the construction of a project. Occasionally, the construction contract requirements state that products insurance must remain in force for two years after completion of the work. If the construction contract requirements state a time during which the insurance is to remain in force, obviously, one will maintain the insurance for the stated length of time.
How long do you keep insurance in force when there are no time requirements in the construction contract? The hired and non-owned auto can be dropped immediately as there is no exposure to the members of the joint venture once they have ceased functioning as a joint venture. Likewise with the workers compensation. As soon as the entities cease to function as a joint venture, there is no possible workers compensation exposure to the former members of the joint venture. The commercial general liability and commercial umbrella policies are different. Even though the joint venture has ceased to function, losses can happen that will be charged to the participants in the joint ventures.
A contractor in a small Wisconsin town designs, builds, and installs steel railings in stadiums and arenas. For one project, the railing was properly installed. However, for 10 years workers hit the concrete, in which the railing was installed, with power sweepers, vacuum cleaners, snowplows and frontend loaders, eventually breaking up the cement and bending the railing. A child was injured while playing with the piece of cement that was still fastened to the steel railing. The parents of the injured child sued the railing fabricator. There was no protection from the commercial general liability and commercial umbrella policies that were in force during the construction because the injury took place 10 years after the project was completed. There needed to be coverage in force at the time of the injury.
This writer is aware of three ways in which protection can be provided for injuries that occur after completion of the project. One way to protect against this exposure is to continue to carry regular policies for many years. Another is to write discontinued products coverage. With discontinued products insurance, the insurer issues the policy and provides coverage for, let's say, five years. The last way to insure the exposure of a loss due to past joint venture work is to put an endorsement on the policy(ies) the insured buys to protect the insured's ongoing operations. Add an endorsement to cover all past joint venture activities of the insured. In the case of the railing contractor, the "discontinued joint venture" wording would have to be added to the commercial general liability and commercial umbrella contracts in force for the railing contractor 10 years after completing the project.
Joint ventures--not contractors
Based upon examples given here, it would be easy to think that all joint ventures involve contractors. Certainly, while many joint ventures do, there are many other businesses that are involved in joint venture activity. For example, about 80% of new employment involves home-based businesses. They also have an 80% survival rate, which is considerably higher than new business startups taken as a whole. These home-based businesses start off small. Some grow very rapidly and then run into a job that is too much for them to handle. Another issue they will encounter is that the job will require expertise that they do not possess. Some small businesses will simply walk away from the job if either of these two conditions is present. Other small businesses will team up with another small business(es) to put together the capacity to handle the job(s). Usually without knowing it, they have formed a joint venture.
Larger and more established firms, from accountants to architects, are also forming joint ventures to be able to secure work that they otherwise would not be able to do.
Summary
These are the key points that were brought out in this article:
A joint venture exists whenever two or more entities join together to complete a job for money.
Joint ventures are not automatically insured by any insurance policy.
To be insured, the name of the joint venture and the fact that it is a joint venture must be shown on the insurance policies.
Recommended insurance while the joint venture is functioning is commercial general liability coverage, workers compensation insurance, hired and nonowned auto coverage and commercial umbrella insurance.
When the joint venture ceases to function, commercial general liability coverage may be provided in one of three ways:
1. Continue to write commercial general liability contracts.
2. Use a discontinued products contract.
3. Add coverage to the ongoing commercial general liability contract for the firm, for "discontinued joint ventures."
While, historically, joint ventures usually involved construction contractors, today many different types of businesses are becoming involved in joint ventures. *
©COPYRIGHT: The Rough Notes Magazine, 1998