27 March 2023
Joint Venture insurance considerations for international contractors
Most international contractors have at one point formed a Joint Venture (JV) with one or more third party entities in order to boost their ability to secure new business and win tenders. There can also be a desire to collaborate with a contractor who has a recognised and trusted reputation, along with the required skills and expertise, in the local market where a tender is being generated.
The aim is to create a solution which best fits the needs of an opportunity, by bringing together different knowledge, skills and experience to create a bespoke and compelling offer, as well as being a differentiator from its competitors.
JV’s take many forms, including having different legal identities and jurisdictions to some of the parent participants, which can lead to challenges in creating clear, concise and compliant solutions in terms of the insurance requirements and responsibilities of the JV itself and its respective stakeholder partners
How is a Joint Venture structured?
A JV is a commercial arrangement between two or more participants (whether individuals, partnerships or companies) who agree (either for a specific project or for a limited period) to participate in a business enterprise.
Importantly, the individual members of the JV will usually find that they have a ‘joint and several liability’ to the other parties, meaning that they are potentially accountable for 100% of the liability even though they may have a lesser share in the JV agreement. This is an important consideration when considering the insurance requirements as insurers will want to know their extent of liability and what the JV contractual limitations are.
Incorporated joint ventures and unincorporated joint ventures
An incorporated JV structure is a separate legal entity created by its shareholders.
An unincorporated JV is where the JV members work alongside each other but not under the umbrella of a legal entity.
In either situation, their arrangements will usually be supported by a JV Agreement apportioning responsibilities etc. between the JV members.
It is important to note that Employers may still wish the ultimate ’owners‘ of the JV to provide parent company undertakings/guarantees, effectively making the individual owners joint and severally liable.
Methods of working:integrated or non-integrated
Integrated working
Integrated working is where the JV members collaborate, meaning their respective designers or other employees work together, designing installing and constructing the works. The result is that their delivery is unable to be divided or separated between the members of the JV.
Non-integrated working
Non-integrated working is where the JV members and their workforce work independently of each other, with clearly divisible packages of work allocated between them, albeit depending on the JV structure they may be joint and severally liable to the Employer.
A third option that combines these two approaches can sometimes be put in place.
Insurance considerations in a joint venture
Risk and Insurance Managers will need to pay close attention to both the model of the JV and method of working in order to understand the exposures they bring to their retained and transferred risk mechanisms. This then allows them to make some informed decisions as to what they may wish to accept under existing corporate/annual insurance arrangements, as well as what they may wish to ring-fence under alternative project specific arrangements.
In addition to JV structure and method of working information, the following will assist both risk/insurance managers as well as insurers to understand the proposed structure and make further informed decisions:
- Standard project details plus an understanding of scope of work/risk responsibility within the JV
- JV Agreement
- Insurance requirements in main contract
- What JV clauses are included within JV members existing insurance arrangements
- Is the JV employing anyone directly?
- Who is providing items of Contractors Plant and Equipment (CPE) & Motor Vehicles for the JV?
- If unincorporated, is there a possibility that the unincorporated JV could employ temporary staff or Labour Only Sub Contractors (LOSC)?
Insurance approaches for joint ventures
Joint venture specific policies
These policies are designed to provide primary cover to the JV in respect of its first and third party exposures, thus removing all (or nearly all) operating exposures from the parent company’s existing arrangements.
Benefits
The benefits of having such arrangements include having single excesses for any insured losses, aligned loss adjusting and claims handling, which should allow loss scenarios to be resolved more quickly and efficiently, and uniformity of insurance coverage under a single wording for clarity and comfort.
Challenges
The key disadvantage of this arrangement would be one of cost. As the JV has no trading experience or loss history, insurers have little to no data on what claims it could expect to see arise. A good broker will leverage key existing relationships between insurers and the JV members to try to minimise the impact of having stand-alone insurance arrangements, which is assisted by gathering as much of the information as listed above. This is an area where Gallagher have expertise and can assist to advise the JV on best market approach and utilise our leading market relationships to secure the most competitive terms.
JV included under one Parent company insurance arrangements
If one of the JV Parent companies is greater in size than the others, then the view may be that they may be more suited to taking on insurance responsibilities for 100% of the JV under their existing insurance arrangements.
Benefits
The dominant parent insurance arrangements may have broader cover (compared to the other JV parent company insurance arrangements) and that they may benefit from economies of scale, which assists in keeping associated costs down.
Challenges
However claims suffered by the JV could significantly affect the dominant parent company’s claims experience, even if the loss was caused by other JV member’s activities and was outside of the control of the parent company. Such losses may also affect aggregation of limit available to the parent company for non-JV related activities.
Additionally, differing insurance philosophies (including retained risk profile) may affect other JV parent companies, where ordinarily they would look to transfer more risk into insurance rather than retaining a large amount on their own balance sheet.
Each partner insure their own financial share
This type of solution works best where there are clearly divisible packages of work performed by each JV partner, Non-integrated working as referred to above. Therefore, in the event of a loss it should be straightforward to identify which JV partner was responsible and therefore notify their insurers accordingly.
Benefits
Reduced administrative burden of managing separate standalone policies. Each JV partner looks to their own insurance programme to provide cover in respect of their share of the business activities and should therefore be more familiar and comfortable with the scope of cover being provided as well as policy limits, deductibles etc. However, this could be a less appealing option to the Project Owner and/or Employer as it is a more fragmented approach with the possibility of two or more different insurance policies and insurers covering the same risk, which could result in unaligned claims handling and lack of clarity as to whether the risk is fully insured.
“Gallagher can advise the JV partners on the best market approach"
Once there is a clear understanding of business activities and the extent of divisible packages of work as well as the terms within the JV contract, then it may be prudent to take a different approach to insurance by using a combination of the options as listed above.
This would depend on the class of insurance, for example, a JV that has clearly divisible packages of work may share a fleet of motor vehicles. Therefore, in order to preserve existing motor fleet claims history, it may be a better option to place a separate motor fleet policy. However, under the same project the dominant partner may look to cover the Construction All Risks and Third Party Liability element under their own existing insurance arrangements.
The key questions to ask as you consider each insurance requirement will always be:
- What is the JV structure?
- What is the method of working? Integrated or non-integrated
- Are there clear divisible packages of work within the method of working?
- Do any of the JV Partners want to use their corporate/annual insurances?
Ultimately, whatever insurance solution is proposed it is important the arrangements are clearly documented and can be called upon easily in the event of an insured loss.
In the case of long-term liability claims (such as Professional Indemnity insurance), the claim could be triggered some time after the JV has completed its works and been disbanded. Therefore, with changes in partner business models and personnel, tracking down the liable party and the associated insurance arrangements could be problematic and could result in some unnecessary legal defence costs.
Lastly, there are other considerations, which are not necessarily specific to JV business, and form part of a wider topic of discussion, but should also be considered, for example:
- When a JV is made up partners from different countries and therefore different insurance practices (i.e. in the UK injury to employees is insured via compulsory Employers Liability but in many European countries it is via social security albeit with scope for subrogation).
- Alternatively, a UK contractor working in France may need decennial liability arranged with a French partner.
- And then there’s also the question of global insurance compliance issues such as admitted and non-admitted, financial interest how cover is evidenced, billed, paid with associated taxes etc.
These considerations are often applicable as JV’s are often formed with local partners when entering a new territory.
At Gallagher Specialty we have the knowledge, skills and experience to be to help international contractors navigate their way through this often complex process. We offer thorough reviews of contractual arrangements for the formation of the JV, as well as its contractual obligations to the Owner/Employer and propose compliant insurance solutions, on which informed decisions can be made.
If you have any questions or wish to discuss this topic any further, as well as any other associated topics relating to construction insurance, then please do not hesitate to get in touch.
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