An owner of a small engineering firm recently asked us to review a joint venture agreement for issues of insurability. When we spoke, he was unable to adequately explain why he and this other party were forming a joint venture as opposed to providing services in a more traditional arrangement with a prime design professional and a subconsultant. He did not understand that as a member of the joint venture, he would be fully liable for the business risks of the joint venture and the other joint venturer’s acts and omissions.
A joint venture is essentially a partnership, but only for a specific, usually limited purpose. How the joint venture is organized, how it assigns tasks, and how it measures performance is a business management process. To the rest of the world however, the joint venturers are one entity and are “jointly and severally” liable for any contractual breach or professional liability. That means that anyone making a claim against the joint venture may recover the full scope of damages from either party or from both parties in any combination.
Many design professionals approach joint venturing on a far too casual basis. Some firms do little to anticipate the problems a joint venture might create. When forming the joint venture the parties should review the level of coverage and deductibles for each party, how the parties will internally fund deductible obligations, and to what extent the parties will attempt to participate in a common defense against professional liability claims that would be applicable on a joint and several liability basis.
While each firm’s professional liability insurance usually covers the specific firm for its exposure to professional liability claims caused by its negligence in the performance of professional services, comprehensive policies such as the Schinnerer and CNA policy also provide coverage for the firm’s risk as a joint venturer. While this provides greater protection in the event of a claim, because of the shared liability the negligence of another joint venturer could result in the policy being eroded by negligence that is outside of its control. Firms entering into a joint effort should understand the legal status of joint venturers under the applicable law and the insurance coverage ramifications of sharing risk.
For more information on the risks inherent in joint ventures, policyholders and brokers can check out our Management Advisory on the subject.