Joint ventures: Do they Need Insurance, and if so, why?

Introduction

Take a moment to imagine setting up a business with another person. Now consider how you will divide roles, as well as risks. To safeguard the risks, one usually opts for insurance. The same goes for joint ventures when two structurally different entities come together for a particular goal. Don’t you think there will be a need for insurance in joint ventures to safeguard the interests of the parties?

A joint venture is a commercial agreement in which two or more parties combine resources to complete a particular goal. This work might be the start of a new project or any other type of commercial activity. Each partner in a joint venture is liable for its earnings, losses, and risk. 

Additionally, the venture is distinct from the partners’ other commercial interests. Joint responsibility occurs when parties are accountable for the same act and must pay reparation. A person mistreated by many parties may be awarded damages. One may choose to collect from one or more parties.

In this case, the guilty parties must pay the total damage award. The same may be shared among several parties or come from a single party. Each party would be accountable for a portion of the damages or all of it. Understanding how the joint venture will perform the task is crucial. Then whether it will be part of the plan is critical to developing the right insurance plan. This article will elaborate on the need for insurance in joint ventures.

What is Joint Ventures Insurance?

By definition, a joint venture and a partnership look similar. However, they differ in liability. Partnerships are long-term business relationships. In contrast, joint venture are legally binding agreements that are usually goal-oriented and dissolve once met. Joint venturers must begin with transparent and fair agreements.

Complex projects may require expertise that only a venture partner can bring. Whatever the reasons for entering into a JV agreement, it needs careful consideration. At this juncture, insurance in joint venture agreement comes into the fold to hedge interests. The JV partner should have an efficient insurance program to reduce exposure. The insurance should be from the beginning to the end of the joint venture agreement.

Insurance is needed in joint ventures as professional liability is created by one or the other joint venture partner. Therefore, insurance in joint venture coverage is one of the best practices in the current age.

Why is there a Need for Insurance in Joint venture?

Like profits, losses are shared by all partners in proportion under the joint venture agreement. Usually, a joint venture partner is jointly and severally liable. This general liability is for the acts of the constituent partner. Therefore, The issue of incorporation raises several intriguing insurance-related problems.

In the case of an incorporated joint venture, it is evident that a business has a separate legal entity. JV hires employees directly and contracts with principals, subcontractors, suppliers, and consultants. The situation is murkier in the case of unincorporated joint ventures.

Considering the above paragraphs, one can understand how the Joint venture structure can be strenuous. Therefore it is pertinent to have insurance in joint ventures due to the general “privileges” granted in the joint venture agreement. 

The two insurance programme goals are:

1. Severability.
2. Removing the ability of one carrier to subrogate against any member of the JV agreement.

Limited insurance solutions are available for general liability. The end goal is to employ relevant endorsements to ensure severability. Moreover, non-subrogation among the different organizations.

What is the Procedure for Insurance in Joint Venture?

Insurance plays a vital role in joint ventures, which can only be fulfilled by understanding the structure. Financial services exist to help the joint venturers.

All insurance is of two types:

1. That can be project-specific
2. Added to a Joint venture coverage

Project-specific services are more expensive but can be tailored to a strategic alliance. They will have a single point of contact for claims as well as mutually agreed-upon coverage and deductible limits. A partner and an insurer can also add a joint venture agreement. Such aspects can create members’ exposure as well. Conflicts can arise when partners have different levels of coverage or deductible amounts.

Having proper due diligence is necessary for any insurance approval. The companies’ attorneys work full-fledged to ensure that the payout meets standards. Therefore, there must be a proper consultation between the company and the attorney for a smooth process.

What are the Options for Joint Venture Insurance?

In general, insurers view joint ventures with more caution than they would a single insured. It is because joint ventures typically exist for a specific project. Moreover, there is no combined claims history on which to base an underwriting decision.

The previous part has done well in explaining the insurance option. However, to put it in a pointer, these are some Joint Venture Insurance options available in the United States and the United Kingdom: –

One or other joint venture partner to insure another

One of the growing solutions is – for one of the joint venture partners to agree to cover the financial interest of another partner.

Insurance coverage is created when a partner takes a step to safeguard the other. The Joint venture coverage should be simple. This solution will benefit from more cost-effective insurance pricing. There is a high chance that the annual insurance rating will be more competitive. There can be complete regulatory approval. There is an increase in the need for insurance in joint ventures with insurers.

Criticism

The primary criticism of this arrangement is that joint venture partners are hesitant to expose their annual insurance programmes to the acts, errors, and omissions of others. Generally speaking, it is unwise to disclose complete copies of policy wordings for commercial confidentiality reasons. Accordingly, it creates a lack of transparency in the cover provided by the joint venture partner.

Each joint venture partner to insure their financial interest

Joint Venture obtains its insurance as seperate entity. It could be the most appropriate option for an entity. Even if this is the most friendly option for protecting the joint venture. There are additional benefits for each party.

First, experience loss is assigned to the joint venture rather than the members. Second, losses caused by the JV do not affect the members coverage limits. Third, rather than multiple carriers, claims are handled by a single carrier.

Another advantage of purchasing separate insurance coverage is the breadth of protection available. It is the best method when a joint venture is formed to run an operation and manage the risk.

Criticism

One prominent drawback noted is on the front of the policy excesses mainly because it poses a problem if they are significant. The insurance excess for each joint venture partner will only apply to that partner’s financial interest in the claim.

Furthermore, insurers will want to know if the health plan is addressed and that all employees understand what is expected of them. Every company does things differently. Identifying safe working practices with partners is essential to reducing risk and reassuring a particular service provider. 

At the same time, it is recommended that health plans are in check. More often than not, the companies do not adhere to it, creating a loophole. A loophole can be exploited the most by an insurer.

Class considerations

Before forming a  joint venture, prospective joint venture partners should consider various issues ranging from the business structure to legal implications, tax issues and potential liabilities and cultural issues.

Additionally, joint venture partners will also collectively consider the the following issues before forming a joint venture; –  

• The core objectives of the joint venture;
• The duration of the joint venture i.e definite or indefinite;
• Investment plans including available resources and values to be dedicated to the venture by each member;
• The control mechanisms of the joint venture; and
• Specific responsibilities and liabilities of members.

Insurer’s attitude towards joint ventures

Insurers are normally cautious while dealing with joint ventures as opposed to their approach on a single insured. This approach is due to the fact that joint ventures are mostly formed for purposes of a specific project and there is no any claims history to base an underwriting decision on a combined claim. However, in an instance where a Joint venture is formed from joint venture partners the insurers have already insured on an annual basis which means that they will be more comfortable with the risk.

This is because, in Joint Venture Partners (JVPs), each partner is held jointly and severally liable for the other partner’s work or services, and where their scope of work is separate from the normal work undertaken by the other then the full scope of the joint venture contract is agreed by the insurers.

Joint Venture Concerning Marine Insurance

Only in the previous century did the Titanic sink. This journey claimed many lives and over $9 million in monetary losses. However, one insurer, ‘White Star Line,’ covered almost all property claims, relieving the investors of some of their burdens. It indicates the need for insurance in joint ventures, even in marine purview.

As discussed earlier, individual partners under joint venture agreements have much general liability. The majority shareholder holds the majority stake. Therefore, the investor relations are maintained by the insurance company. Marine transport is threatened to a greater extent than other modes of transportation. The sea offers various perils, from weather or natural hazards to cross-border conflicts and pirate attacks.

Conclusion

When it comes to one joint venture partner being held jointly and severally liable for the other joint venture partner’s work, insurers must accept the full scope of their contract if they go outside your usual work scope.

Joint venture partners are unlikely to share the same philosophy or insurance company. Different indemnity limits and scope of cover will almost certainly exist. Therefore, implying that the partner must be willing to compromise to reach a common ground position. The need for insurance in joint ventures is a need for the hour. However, a greater need is for better cohesion amongst joint venturers.