This guest post was written by Bud LaRosa. It was originally posted on another blog, http://blog.construction-today.com/
By Bud LaRosa
Construction is seeing a lot more joint ventures now than it has in the past. Projects are becoming larger and more complex, requiring a certain expertise that only one or more of the partners can bring. Whatever the reasons for entering into a JV, there are many risk factors that need careful and consideration.
When writing a JV agreement, managing risk is always a concern. Considerations are:
- The JV is liable to third parties for acts of any other member of the JV,
- When third party liability occurs, all JV members are jointly and severally liable,
- JV members can be held liable to third parties for breach of warranties and construction defects,
- A JV member is not limited to liability of his ownership share of the JV, and
- Liability for acts of the JV survives dissolution of the JV (long-tail liabilities).
In order to mitigate exposure, a JV partner should have an efficient, integrated, cost effective, stable and long-term insurance program from the start to the end of the statute of limitations. Types of insurance include all casualty and excess, which can either be project specific or added to a JV member’s master policy. Project specific insurance tends to cost more but can be tailored to the project. These will have one point of contact for claims, mutually determined coverage and deductible limits. Adding to a master program can increase a JV member’s policies to exposure caused by other members. Conflicts can occur when partners have different coverage levels or deductible amounts.
Other considerations include whether to bond all subcontractors or use a sub-guard program; or determining in advance how to insure autos and/or equipment, especially where the partners bring their own autos/equipment into the JV (for example: what happens if an employee for the JV is using a members vehicle and gets into an alcohol related accident).
Insurance is not the only component of risk management. Claims management and loss control services are necessary to minimize the value of any claims that happen.
Communication is the biggest factor for identifying and assigning/assuming risk. Precautions your company can take are:
- Involving the risk management/insurance group early in the process (pre-bid)
- Clarifying the insurance structure prior to the bid date
- Effectively articulating the JV structure
- Not mistaking separate payrolls for separate liability
- Documenting how partner vehicles will be insured
- Deciding how assets brought into the JV will be covered by insurance (e.g. equipment)
- Not assuming that the other party is taking care of something
Like many issues in construction, success in managing JV risks is strongly reliant upon extensive planning, continual communication and flawless execution.
Bud LaRosa (pictured) is the chief business performance officer for Tocci Building Companies. He leads the implementation and execution of all performance metrics and strategic initiatives, and is also the chief financial officer and responsible for all financial reporting and risk management. He can be reached at [email protected].