From the Insurance Broker:
Joint Ventures
There are so many complicated, nuanced, and potentially dangerous aspects of entering into a collaborative arrangement with another design firm that one could fill a book, but we’ll keep it short and sweet. If you’re considering forming a joint venture here are the ABC’s to consider.
Adequate & Comparable Insurance
By entering into a joint venture, even informally, by co-signing a contract, or presenting yourselves as a “team,” you are often assuming legal responsibility for the actions of your partner. Ideally, both partners should carry similar insurance policies — if possible through the same insurer — so that there is less chance each insurer tries to push the responsibility for a claim off on the other.
If your “team” isn’t using the same insurer, at least try to carry the same limits of liability, because if one firm has, for example, a $2,000,000 policy limit and the other has a $500,000 limit, the firm with the larger policy will likely become the primary target of a claim. In a claim where the liability is shared, the larger liability holder may have to pay a larger share of the damages. Also, if the claim is large enough to exceed the limits of the firm with the smaller policy, the other firm may be stuck with the rest of the liability.
Finally, most policies tend to treat coverage for joint ventures similarly, but this is not always true, so it is important that each party’s policy be reviewed to ensure that the coverage is comparable and that no other exclusions apply.
Be Clear on Each Other’s Responsibilities
A clear separation of the duties and responsibilities of each participant in a joint venture is crucial, and we often see it missing from contracts or joint venture agreements. We understand why: you’re trying to come across to the client as a single collaborative entity with single point responsibility — for their benefit — so they don’t have to deal with multiple consultants doing different things on different schedules with different points of contact.
The problem, though, is that if something goes wrong and if a claim is made, who is responsible? If each party’s scope isn’t clearly defined somewhere in writing, then the answer is probably “both of you,” and all will be named in the claim. Neither firm will be able to distance itself from the other’s performance and may ultimately be held liable for the other their actions, so make a list!
While it might seem counterintuitive for a joint venture to define each partner’s work separately, your teams have an agreement between yourselves even if the client may never see it. AIA’s template C101–1993 is a great place to start.
Can you share liability with a traditional prime/sub arrangement?
This is usually the first question we ask a client who is pondering a joint venture. If the answer is “yes,” then most of our concerns vanish. In many cases, two firms want to work together on a project but there’s no real reason they can’t do so with one contracting with the client/owner, and hiring the other to perform specific services. Usually one participant is larger anyway, so it makes sense for them to assume the prime role.
In this arrangement, the prime is responsible for all the services delivered to the client and the sub is only responsible for their own services. There is no mutual sharing of risk or ambiguity when it comes to authority and responsibilities. Keep in mind, however, that it is still important for both parties to be adequately insured, particularly the one in the sub-consultant role, so that the prime doesn’t get hit with the liability of the sub because the sub’s policy had insufficient limits to address a claim made against it.
