-Partners in Practice -

Some things break. Others have a way of falling through cracks. One of the challenges posed by joint ventures is that, somehow, more things seem to fall through more cracks. This, at any rate, is the experience of most professional liability insurers, and it helps to explain why they tend to be so wary where joint ventures are concerned.

There are good and valid reasons for forming joint ventures, reasons having nothing to do with reservations your insurance carrier might have. They may offer access to important, but distant markets; they may be the only way to respond to political realities; they may be necessary to bring together the expertise needed to solve a particular design problem. Nevertheless, the caution with which insurance underwriters approach joint ventures is fair warning. It suggests you might best approach them with a certain amount of caution of your own.

Two principal concerns emerge at the outset. The first has to do with the legal status of joint ventures and the insurance issues that arise as a result. The second relates to the difficulties in coordinating the work joint ventures impose on an already complex undertaking.

A joint venture is a separate legal entity, much like any other partnership. Under the law, each of the joint venture partners is fully responsible for the acts of the joint venture and the obligations it assumes. If a loss should occur, and should one of the partners lack the financial capacity to respond, the law would look to the others to make good on the damages.

The principal difference between a joint venture and an ongoing partnership is that joint ventures are normally formed for a specific purpose of limited scope. This presents both a problem and an opportunity. The problem is one of communications: The silent understandings and shorthand communication practices that tend to develop among partners over the years are usually missing in joint ventures. The opportunity is that the limited scope of most joint ventures makes it possible to reach those understandings in advance and reduce them to writing. Indeed, it would be a mistake not to.

Professional liability insurance is a major consideration. Joint ventures are excluded from coverage under some policies, but not all of them. This may mean that you either have to have your interests endorsed onto your existing policy, or you have to obtain separate coverage. A separate insurance application may be required, and the underwriters may want to review your agreement with your joint venture partner.

They will want to know about coverages already in place. If your joint venture partner is uninsured, for example, your carrier is not likely to be willing to endorse your interests onto your existing policy. There is too great a risk that your policy would have to bear the full burden of any loss, including a loss for which your joint venture partner may be responsible.

Similar concerns apply where a wide disparity exists between limits of liability or deductibles. If you carry $5 million in professional liability insurance and your joint venture partner maintains only $500,000, consider what would be likely to happen in the event of a $2 million loss. On the other hand, if your deductible is $50,000 and your partner's is $5,000, how far do you think you would be willing to go in defending against even the most unreasonable $20,000 claim? Conflicting interests in situations such as these can cause serious problems, and the underwriters are going to want to preclude them whenever possible.

It may turn out that the only practical solution is a separate project policy. This has the advantage of separate limits and a single deductible. But, it can also add expense, and it carries with it the burdens of added administration, premium financing, and the management of costs incurred within the deductible. It also raises concerns about how your interests in the joint venture are to be protected after the joint venture policy expires. These issues, as well as how your other coverages might be affected by the joint venture, need to be discussed with your insurance agent or broker before you finalize your agreements.

Providing for insurance protection takes care of part of the problem at the front end. Another, equally important part lies in defining the roles and responsibilities of each of the partners and then deciding who is going to see to it that those roles and responsibilities are carried out--on time, within budget, and with the appropriate degree of quality. These issues, too, need to be carefully thought through and agreed upon before you set to work.

Someone has to be in charge. This applies not only to the major decisions likely to be referred to principals, but to those typically assigned to your project manager, production staff, field representatives, and so on. Remember, the policies, practices and procedures that work so well within your firm may have little bearing on your joint venture--unless you give some thought to how they are going to be applied under a very different set of circumstances.

You have seen how decisions can be deferred within a partnership, sometimes indefinitely, when equal partners cannot agree on a course of action. In the interest of harmony (and sometimes to prevent the bruising of sensitive egos), some issues are never even raised in the first place. It may be possible for a partnership to survive under such circumstances, but it does not seem like an ideal way to bring a building project to a successful conclusion. There are too many others involved.

The best thing you can do is take advantage of your need for a written agreement with your joint venture partner. Use it to be as specific as you can about how decisions on the project are to be made, who will have the last word, who is to be in charge of what aspects of the work, and how the channels of communication are to be established and maintained. Otherwise, coordination of the work can be a chaotic experience. If so, the possibility that someone may fail to meet an important responsibility looms large.

All things considered, it might be best if you were to avoid joint ventures entirely. But, if a joint venture is your only alternative, a certain amount of foresight and a fair amount of effort on your part can normally offset most of the disadvantages. There are costs involved, however, and where possible, this hard reality ought to be discussed with the owner. Often, it is the owner who stands to benefit most from your willingness to form a joint venture. Where this is the case, it is the owner who ought to bear the added expense. Everyone's interests will be better served if you are in a position to do all you can to minimize the possibility of more things falling through more cracks.

Page updated 6/19/00