CONSTRUCTION SERVICES - Gallagher...CONSTRUCTION SERICES 2 CONSTRUCTION SERVICES AJGINTERNATIONAL.COM ARTHUR J. GALLAGHER Types of JV arrangement Any kind of collaboration can be regarded

CONSTRUCTION SERVICES AJGINTERNATIONAL.COM ARTHUR J. GALLAGHER 2

CONSTRUCTION SERVICESTechnical Briefing Joint Ventures – What are the Risks?

CONSTRUCTION SERVICES


Arthur J. Gallagher Construction Services recently hosted a joint seminar designed to provide participants with an insight into the issues surrounding Joint Ventures. Chris Doran, Partner at DAC Beachcroft LLP, explored the issues surrounding liabilities and the allocation of risk, Edwin Lawrie, BAM Nuttall Limited, then examined the insurance considerations and Andrew Marsh, also a Partner at DAC Beachcroft LLP looked at the professional indemnity issues. Following on from the presentations a panel comprising the main speakers, together with Mike Roberts, Managing Director, Cunningham Lindsey Construction and Jason Stephens, Arthur J. Gallagher, took questions from the audience.


JOINT VENTURE CONTRACTING: LIABILITIES AND THE ALLOCATION OF RISK CHRIS DORAN, PARTNER, DAC BEACHCROFT LLPThe Hon Mr Justice Akenhead recently reminded an audience that the roots of our modern system of construction law lie in the Code of Hammurabi, devised by the sixth King of Babylon in 1772BC. The code had a certain simplicity in its provisions. It provided that:• where a contractor builds a house for a man

and does not make its construction firm and the house which he has built collapses and causes the death of the owner, the builder shall be put to death;

• if it causes the death the son of the owner, the builder’s son shall be put to death;

• if it be the case that the slave of the slave of the owner is killed, the builder shall give the owner of the house a slave of equal value;

• if a man makes a breach in a house, code required that the builder should be put to death in front of the breach and then thrust through it.

The code therefore created a very simple regime. The builder didn’t really need any insurance – save perhaps for some good life assurance. However, today’s construction contracts are considerably more complex and so are the insurance requirements needed to support them.

What is a Joint Venture?Joint Ventures have become increasingly common here in the UK and internationally too. There are good reasons for this. The UK Government entered into its first Joint Venture arrangement a couple of years ago with Capita. Most recently when the Prime Minister of China visited the UK he entered into a Memorandum of Understanding with the government for the design, construction and operation of both new and existing rail infrastructure. In the past 18 months China has invested eight billion pounds into projects in the UK, many of which are taking place through the medium of JV arrangements, and the government expects that the use of JV contracting will continue to increase significantly in the future. It’s therefore timely that we should be examining those risks today.A Joint Venture (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 of time) to participate in a business enterprise, usually for profit. JV partners frequently share profit and risk equally but they are free to agree and allocate both as they wish.

“Joint Ventures have become increasingly common here in the UK and internationally... and the government expects that the use of JV contracting will continue to increase significantly in the future”.



Types of JV arrangementAny kind of collaboration can be regarded as a JV. • In the case of an integrated JV, the

partners work together to share expertise and resources to deliver a project. Here the JV partners work so closely that it is often impossible or impractical to determine which partner has committed a breach of contract or other default and, as a consequence, they generally share liabilities and profits. In these circumstances, the partners will normally consider project or JV specific insurance arrangements.

• In a non-integrated JV the partners have distinct roles – for example, one producing the design and the other carrying out the construction works. Here, despite their joint and several liability to the employer, the partners may retain rights of recovery against each other and reliance on their respective annual policies may be more appropriate.

The benefits of JV contractingIn 2011 the average construction dispute in the UK was around £6.5m. By 2012 it was £17.7m. Globally, the average dispute is about £20.4m and in the Middle East the figure is £40m. Part of that increase (as far as domestic disputes are concerned) can be explained by the fact that smaller disputes tend to be dealt with through adjudication with only the larger disputes going through the courts. Construction disputes are becoming larger and more complex so contractors need to look more carefully at how they can share and allocate risk.In addition to sharing risk, JV contracting offers participants additional benefits too. One is that the JV model allows them to combine talent and resources; helping them to avoid errors in bids and increase their bidding power and economies of scale – particularly important in the case of very large projects. JVs can also assist expansion into new markets, for example where one partner joins up with a local partner to help compliance with local pre-qualification rules and thus enhance its chances of winning the contract, particularly in relation to government backed projects. Depending on the

circumstances there may well also be tax advantages to adopting a JV structure.For employers JVs are attractive because, in addition to delivering economies of scale, greater competition and broader expertise, the ability of JVs to assume a greater level of risk in certain contract forms, for example in the case of the FIDIC Silver form, enables the employer to purchase a level of cover beyond that which is the norm for other forms.

Structure of JV arrangementsIt’s important to ensure that there is a JV agreement in place setting out the liabilities and obligations of each JV member to the other. A well structured JV agreement should set out:• the purpose of the JV;• how it will be managed;• the contribution of resources that each

JV partner will make and how profits (and losses) will be shared;

• the obligations of each partner – effectively what each is bringing to the arrangement and what they will be doing;

• how risk and liability will be apportioned;• how disputes will be resolved – particularly

important given that the number of disputes between JV partners is currently increasing; and,

• how the venture will be funded.There are a number of ways in which the arrangements can be structured, each of which has pro’s and con’s:Partnership – Either in the form of a Limited Liability Partnership (LLP) or a less formal unincorporated partnership.The advantages are that such arrangements are inexpensive to set up (and to terminate) less formal (especially in the case of non-LLPs) and each partner is able to retain control over its own resources and maintain accounting privacy.The negatives are that unless an LLP is created, liability for each partner is unlimited. There may also be issues surrounding funding and access to performance bonds and/or parent


company guarantees – with the parent less likely to provide these, especially where they may be liable for the activities of the other partner.Corporate Entity – This is the most common form in more complex and longer term projects.The pro’s are that a separate legal entity is created with clear management structures, limited liability and financial integrity – assets are held in the name of the JV entity – which may help with financing options.Against this is the fact that, depending on the jurisdiction, there might be significant compliance requirements. Further, there may be less flexibility in governance arrangements and, should the partners wish to terminate the arrangement, this is more complex to achieve. Finally, the obligations of each partner can be unclear meaning that it’s extremely important to ensure that a comprehensive JV agreement is in place from the outset.Non-integrated JV – These are generally utilised for very short term projects where it is easy to distinguish between the services of each partner. No formal partnership or other company structure is created and each partner is responsible for specified work and is responsible for providing the expertise and resources to carry out that work. Under such an arrangement there is no sharing of profit and losses – how efficiently each JV partner carries out its share of the work determines the level of profit enjoyed by that partner.The advantages are that each partner is able to compliment the other’s skills – one may be responsible solely for design the other only for construction. Plus, such arrangements quick and inexpensive to set up and the insurance arrangements required are much less complicated.Against this, the absence of a unified management structure can lead to disputes and, as with unincorporated partnerships, there may be difficulty in obtaining access to finance, performance bonds and/or parent company guarantees, with the likelihood that partners will need to access bonds through the commercial rather than insurance market.

Ultimately, the chosen structure will depend upon a number of factors including:• the commercial objective of the JV. In the case

of a single project there is likely to be a looser arrangement, where a multi-project association is involved then there may be a corporate entity;

• the tax position;• liability and the importance placed on

limiting liability will dictate whether adopting a corporate structure or a looser LLP type arrangement is appropriate, as will decisions taken as to how the partners wish the JV to be managed;

• the question of whether assets (including intellectual property) are to be owned individually or corporately;

• the ability to access funding, which may be enhanced by the adoption of a corporate structure; and,

• whether it is possible to distinguish between the work of each partner. Where it is then the option of adopting a non-integrated arrangement is available.



However, whatever structure is adopted it’s vitally important to ensure that the roles of each partner are clearly set out and that a ‘controlling participant’ is identified.The type of insurance that will be required will depend upon the nature and structure of the JV arrangement and therefore thought needs to be given to this before the JV is formalised.

Obligations of JVs under the standard forms of contractA discussion of a contractor’s obligations and the requirements of the insurance provisions under the main standard forms of contract could justify a separate seminar. Nevertheless, it is useful, before Ed and Andrew consider in detail the insurance issues arising out of JVs and JV projects, to briefly consider some of the key provisions.

The Contractor – general obligations and risks

The key obligations for the contractor under each of the main forms of contract, JCT, NEC and FIDIC Red Book, are set out in Table One: Contractor obligations/risks.The first four which can broadly be summarised as being; (i) to carry out the Works in a proper and workmanlike manner; (ii) to complete the design, (iii) to use materials and goods of the right kinds and standards as set out in the Contract Bills and (iv) to complete the Works on or before the Completion Date set out in the contract. The contract goes on to provide that the contractor is to make good any defects – particularly important to remember the need to consult insurers before decisions are taken which could affect insurance cover.• NEC – Section 2, of NEC3 sets out the main

obligations. The first is to provide the Works in accordance with the Works Information which either specifies and describes the Works or sets out any constraint on how the contractor provides the Works. Where design is involved, the contractor is required to design the Works in-so-far as the works information provides.In keeping with its intention to promote collaborative working, NEC also requires

contractors to work with others to provide the information they need in order to provide for the completion of the project successfully by all parties on time.

• JCT – Where JCT is concerned, the relevant section is again section 2. Clause 2.1 requires the contractor to carry out and complete the Works in a proper and workmanlike manner. Clause 2.2 requires the use by the contractor of materials that comply with the contract documents. Clause 2.3 requires the contractor to proceed regularly and diligently with the Works.

• FIDIC – FIDIC section 4 requires that the contractor shall complete the Works in accordance with the contract and the engineers instructions and goes on to deal with how the contractor is responsible for all of the temporary structures that are put on site and for the adequacy of all site operations, plant and materials.

The Contractor – insurance obligations

The JCT, NEC and FIDIC forms of contract provide very complex provisions for the insurance of risk and the allocation of risk. However, a key point to note is that the insurance provisions of each contract are not intended to be an exclusive definition as to what insurance is actually required for any given project. They simply respond to the works that a contractor is instructed to carry out and the level of risk he has been asked to assume.Contracts that successfully allocate risk take into account a number of points.• Risk should be allocated to the party that is

best able to control that risk. • Risk allocation should encourage good

management by the party that carries the risk.• Parties are motivated to manage risk by the

potential financial consequences of assuming the risk.

• Risk should not be allocated to a party that is unable to sustain the level of the risk it is being asked to take on.


• Where the allocation of risk is split this should reflect each party’s ability to influence the likelihood of a loss and its impact on the works being carried out. So, for example, if there’s a joint party arrangement between contractor and employer, in so far as one or other is able to influence risk then this should have a bearing of what level of risk should be apportioned between the two.

A common misconception in relation to insurance is that because a contract form indicates that a

contractor is responsible for taking out insurance, the contractor will ultimately be responsible for that risk. That is not the case. The party ultimately responsible for the risk will depend upon the wording of the contract itself. So, for example, if a contractor takes out cover for damage to the Works, but damage occurs as a result of works carried out by, or activities of, the employer, then unless the employer’s liability excludes this then the employer will be liable for the loss.

Table One: Contractor obligations/risks

Obligation JCT NEC FIDIC (Red Book)

To carry out and complete the works in a proper and workmanlike manner (in accordance with the Contract (FIDIC)).

2.1 20.1 4.1 (includes Permanent, Temporary Works and Materials)

To complete the design 2.2 21 4.1

To use materials and good for the works of the kinds and standards described in the Contract Bills

2.3.1 (Covered by clause 4.1 above)

To complete the works on or before the completion date

2.4 30.1 8.2

Notice by Contractor for delay to progress 2.27 61/16.1 (early warnings)

4.21

Contractor to make good defects 2.38 43 11.1

Consent needed to sub-contract works 3.7 26.2 4.4

Comply with instructions issued 3.10 27.3

Comply with Health and Safety requirements (i.e. CDM regs for JCT)

3.23 27.4 6.7

Indemnities provided to Employer 6.1 & 6.2 83 17.1

Consent for assignment 7.1 1.7

Co-operates with others 25

To obtain Performance Security 4.2

To appoint a Contractor’s Representative 4.3

Co-operate with Employer’s Personnel, other Contractors and Public Authorities

4.6

Set-out the work in relation to original points, lines and levels referred to in the contract

2.10 4.7

Testing 3.17 40 7.4

Preparation of programme 2.9 31 8.3



Table Two: Insurance Contractor Obligations summarises the sorts of risk that each of the three main contract forms requires to be insured and the provision under each contract that sets out that obligation.Under the NEC and JCT forms the indemnities are part-and-parcel of the insurance arrangements so, in order to understand the insurance component, it is necessary first to understand what indemnities the contractor provides to the employer.• NEC – Section 8 of the NEC form of Contract

sets out the allocation of risk. Clause 80.1 sets out the areas of risk for which the employer is solely responsible (the “Employer’s Risks”), including: (i) claims, proceedings, compensation arising from the use of the site by the works and any negligence caused as a result of the actions of the employer; (ii) any loss or damage to plant or equipment supplied by the employer to the contractor (which is the employer’s risk) (iii) loss or damage to the work, plant and materials due to specified risks such as wars, or radioactive contamination are also at the employer’s risk. The contractor will not have liability should these risks occur.Where the Works have been taken over by the employer on completion of the Works then the employer carries the risk for the Works unless the loss occurred before the issue of the Defects Certificate due to a defect that existed at takeover or is an event occurring before takeover that was not an Employer’s Risk.The areas of risk for which the employer is responsible having been set out in clause 80.1 from that point on the position under the NEC form is relatively simple; starting with the Start Date under the contract, and until the Defects Certificate for the Works (or any section of the Works) all other risks are carried by the contractor, unless that is altered in the Contract Data. Therefore, the contractor must provide those insurances set out in the Insurance Table in the NEC form.The insurance that the contractor must take out is a joint risks policy – not envisaging subrogated claims against other JV members

but rather in the form of a joint names policy. The policy will include loss and damage to the works plant and materials, loss and damage to equipment, liability for loss or damage to property or any liability for death or personal injury.The only contract in the JCT and the FIDIC suites that alters these positions is the Silver Form for ‘Turnkey’ contracts pursuant to which the employer pays a premium to the contractor to take on a higher level of risk.

• FIDIC – FIDIC deals with risk in a similar way, it sets out risks that the employer is responsible for with the other risks to be borne or dealt with by the contractor. It is not seeking to identify fault. It is simply the case that where there is loss or damage then the contractor must have taken out insurance against those risks.There are two types of insurance required: - The first is insurance for the Works, plant,

materials and contractor documents and employer’s equipment for full reinstatement for damage to those items arising from any cause, whether or not the contractor is contractually liable for the damage.The insurance taken out by the contractor can exclude certain types of loss including those arising from defects in the design that is not its responsibility; and parts of the works which are lost or damaged in order to reinstate another part of the works which is the result of defective design. So, for example, if there were to be defective design in ‘area one’ and in carrying out remedial work damage occurred in ‘area two’ this latter damage would be something the employer would have to assume the risk for.

- The second is for loss, damage, death or personal injury as a result of the contractor’s performance.

Whilst the insurance responsibilities of the contractor and employer are set out there are also indemnities that stand alone. Clause 17.1 provides that;


Table Two: Insurance – Contractor Obligations

Obligation JCT NEC FIDIC

Loss of or damage to the Works, Plant and Materials until Practical Completion (and Contractor’s Documents in respect of FIDIC)

84.1/84.2 (Joint names and for replacement Cost)

18.2 (Full re-instatement value, professional fees and profit)

All Risks policy for reinstatement of the Works and Site Materials (New Buildings) up to Practical Completion.

6.7 Schedule 3: Option A

(Excluding damage due to defects in the design or workmanship or Excepted Risks)

(Joint name policy) (Can be project or annual policy)

Liability for loss or damage to property due to negligence of the contractor etc (except loss of or damage to Works, Plant, Materials and Equipment)

6.2/6.4 84.1/84.2 (joint names policy)

18.3 (joint names policy)

Loss of or damage to Equipment 6.2/6.4 84.1/84.2 (joint names policy)


Liability for personal injury to or death of a person (not an Employee of the Contractor)



Liability for death or personal injury to Contractor Employees


18.4

Employers liability for injury or damage to the property caused by the subsidence, heave, vibration, weakening or removal of support or lowering of groundwater arising out of or in the course of or by reason of the carrying out of the works

6.5.1 (Joint name policy)

Terrorism cover 6.10 (where schedule 3, Option A applies) (Joint name policy)

CDP Professional Indemnity Insurance (where there is a Contractor's Designed Portion)

6.12

The contractor shall indemnify and hold harmless the Employer, the Employer’s personnel and their respective agents against: - bodily injury, sickness, disease or death

of any person arising out of the Contractor’s design, execution and completion of the Works and the remedying of any defects (unless attributable to any negligence wilful act or breach of Contract by the Employer,

the Employer’s personnel of any of their respective agents), and

- damage to or loss of any property, real or personal (other than the Works), to the extent that such damage or loss: - arises out of or in the course of or by

reason of the Contractor’s design (if any), the execution and completion of the Works and the remedying of any defects, and



- is attributable to any negligence, wilful act or breach of the Contract by the Contractor, the Contractor’s Personnel, their respective agents or anyone directly or indirectly employed by them.

This is important because notwithstanding that indemnity, the FIDIC form does not require insurance to back that up and this is an area in which an understanding of the need to balance both risk and insurance provision becomes very important because in the absence of the latter the contractor will be left holding that liability.

• JCT – Where the JCT form is concerned, it’s instructive to look at the indemnities first. The contractor must provide these or its contract is terminated. - Indemnity one (clause 6.1): The employer

must be indemnified against any loss, liability or expense in respect of personal injury or death caused in carrying out the Works, save where that injury or death has been caused by the acts of the employer or any of the Employer’s Persons..

- Indemnity two (Clause 6.2): The contractor is liable for and shall indemnify the employer against damage to “property real or personal” (which definition excludes the Works, work executed and Site material up to the earlier of Practical Completion or termination of the contractor’s employment) as a result of negligence, breach of statutory duty omission or default of the Contractor. However, the indemnity excludes loss and damage to property required to be insured for damage caused by one of the Specified perils, such as fire, flood, burst water pipes etc.

Clause 6.4 states that the contractor should take out insurance in respect of its liability to indemnify the employer in respect of these two indemnities. It must also take out employer’s and public liability insurance.The cover the contractor must take out under the JCT form is an All Risks insurance which must be in joint names.The JCT form provides for three insurance arrangements: - Option A is used for new build projects;

the insurance is taken out by the contractor who takes the risk of any shortfall in the level of insurance that is obtained under the contract.

- Option B is for new build projects where the employer is to take out insurance and here it is the employer that is liable for any shortfall.

- Option C is in respect of extension works to existing structures and generally here it is the employer which effects the All Risks insurance, save in respect of certain specified perils.


The Employer – insurance obligations

Turning to the employer’s insurance obligations at first glance Table Three: Insurance – Employer Obligations appears to be rather sparsely populated. This is because under the NEC and FIDIC forms, the employer doesn’t really have any insurance obligations. The onus is on the contractor to ‘throw’ the insurance obligation on to the employer.Where the JCT form is concerned there is an obligation for the employer to effect insurance. Under Option B this takes the form of a joint names All Risks policy for the reinstatement of the Works and Site materials up to Practical Completion excluding, damage due to defective design, workmanship and Excepted Risks (i.e. radiation contamination, pressure waves or terrorism).Under Option C the employer is required to effect cover in joint names for the reinstatement of the existing buildings and contents due to Specified Perils (i.e. fire, lightning, storm, flood, escape of water etc.). However, unless the position is modified by the contract, the employer does not have any greater obligation to effect insurance.

Joint and Several LiabilityEmployers are keen to safeguard themselves against the risk of default or the risk of partner insolvency.JV partners are generally regarded as being jointly and severally liable to their employer in respect of ant acts, omissions or default.What this means in practice is that both partners to the JV are liable to the employer for the same acts, omissions and defaults. This is irrespective of any apportionment contained in the JV agreement – for example that one partner will carry 90% and the other 10%.The employer has the choice of claiming damages from either or both partners and each partner will, subject to liability being established, be individually liable to pay to the employer all of the losses awarded. The JV Partners may seek to apportion the losses between themselves in accordance with the JV Agreement or claim a contribution towards its liability to the employer to the extent that it considers reasonable. This is the

position whether the JV is integrated or non-integrated. In each case it is up to the employer to decide how to enforce an award of damages and how much it will seek to recover from each of the partners. Therefore, a partner that has assumed a 10% liability under the JV agreement, could find itself liable for 100% of a loss should its partner become insolvent.This highlights the importance of ensuring that adequate guarantee and insurance arrangements are put in place so that the ‘less culpable’ partner is not faced with a liability that it has not anticipated.



Table Three: Insurance – Employer Obligations

Obligation JCT NEC FIDIC

Loss of or damage to the Works, Plant and Materials (and contractor's documents in respect of FIDIC)

All Risks policy for reinstatement of the Works and Site Materials (New Buildings) up to Practical Completion.

6.7 Schedule 3: Option B (Joint name policy)

(Excluding damage due to defects in the design or workmanship or Excepted Risks)

Reinstatement, repair or replacement of existing buildings or contents due to Specified Perils (i.e. Fire, lightning, storm, flood, escape of water etc)

6.7 Schedule 3: Option C (Joint name policy)

Loss of or damage to Equipment

Liability for bodily injury or death of a person (not an employee of the Contractor) in connection with the contract

Liability for death or personal injury to a Contractor Employee

Employers liability for injury or damage to the property caused by the subsidence, heave, vibration, weakening or removal of support or lowering of groundwater arising out of or in the course of or by reason of the carrying out of the works

6.5.1

Terrorism cover 6.10.1 (where schedule 3, Option B or C applies)

CDP Professional Indemnity Insurance (where there is a Contractor's Designed Portion)

JOINT VENTURE: INSURANCE CONSIDERATIONS – EDWIN LAWRIE, BAM NUTTALL LIMITEDBAM Nuttall has participated in a wide range of JVs in recent years. These have included:• Crossrail: Western Running Tunnels,

Farringdon, Liverpool Street, Whitechapel and Wallasea Island. In the case of Western Running Tunnels and Farringdon rather than being a 50:50 JV there are actually three partners. All are integrates and client facing.

• Network Rail: Borders Rail, which was an internal integrated JV and Northern Hub

where, in addition to an integrated JV arrangement, other companies carried out elements of the work as part of an associated ‘alliance’.

• Peel Ports: Liverpool 2; the construction of a new container port facility to take Post-Panamax Container Ships – the new breed of very large container vessels – this is a non-integrated JV.

All are non-incorporated.


What this demonstrates is that JVs can take a variety of forms. They may be integrated; address only parts of a larger project, or internal within a large organisation. They may be client facing, where there is direct contact with the employer or non-client facing, where the JV is further down the contract chain and they can be with either the main contractor or a sub-contractor.Whatever form the JV takes, all arise from one or more of the following:• a desire to take on major projects, to spread the

risk of doing so;• a need to bring in specialist skills; and,• to afford access to a market that would

otherwise not be open to one or more of the participants.

Where a JV works well, this is normally attributable to the selection of partners with a common risk appetite, approach to risk and a shared business culture. In the absence of these the JV becomes very difficult to manage.It’s also important, at an early stage, certainly before actually getting on site, to decide whose processes you are going to use. A JV brings together two teams (or more) of people with different organisational cultures, who may not even have met and yet who need to work together in a particular way. It’s vital to clearly set out processes and procedures from the outset or they will simply continue to work in ways with which they are familiar. Team building and good communications are important as by breaking down the ‘them and us’ culture they play a key part in creating a unified and successful JV.

Insuring the Joint VentureThe partners may have JV provisions in their existing annual insurance arrangements however, the answer to the question ‘does this mean that the insurance needs of the JV are automatically catered for?’ is ‘almost certainly that they are not.’The types of projects entered into on a JV basis are probably going to be too large to be catered for under a partner’s annual Works insurance arrangements. Therefore there is a need to put in place insurance specifically for the JV.

Even where the extent of the individual partner’s annual cover is sufficient, dealing with liability or contract works claims involving two (or more) insurers has the potential to introduce major complications. Given this, regardless of what arrangements are already in place it’s generally better to have a project policy specific to the JV at the primary level, particularly for integrated Joint Ventures.Cover might be imposed in the form of an owner controlled (OCIP) arrangement or it might be a contractor arranged CCIP either way, subject to clear reporting lines and the adequacy of any OCIP, the provision of Works and Public Liability cover for the JV is not generally a problem.Our first speaker dealt with the contractual obligations to insure. Whilst accepting the need to comply with them, it is important to adopt a risk based approach and assess what, as a JV, the parties are prepared to accept as a risk and what should be insured, a process that normally drives the programme beyond the scope of cover that is required under the contract.

Insurance issuesWorks/Public Liability/Plant

In the case of insurance for the works and public liability it’s important to ensure that what is in place is adequate – especially where it is being provided through an OCIP – and provides the cover the partners need, or whether it is necessary to put in place a Difference In Conditions (DIC) or Limits (DIL) policy to augment it.Practical experience shows that in many cases the cover will be adequate. However, there will be situations in which the presence of deductibles or a limited scope to the cover under an OCIP means that the partners will elect to take out DIC coverage. There may also be concerns regarding market security, for example if a captive is involved.Another area that must be considered is the adequacy of the limit of indemnity provided by the OCIP. For example, it might be established at £10m whereas if the employer is, for example, Network Rail the requirement might be for £155m. Consideration needs to be given to how the JV will



deal with the need for excess layers. Generally, subject to there being a joint venture primary policy in place, the most effective way of dealing with the excess layer exposure is for liability to be shared between the partners and for each to rely their existing excess layer programmes. However, a problem can arise where one partner becomes insolvent as the fact there is joint and several liability, means the remaining partner is 100% responsible even though its limit of indemnity might not be sufficient to meet 100% of a claim.As regards completed operations, by their nature, JVs are for a limited period of time and the partners are unlikely to wish to continue paying for public liability insurance after the completion of the project. Therefore although it’s not an ideal solution, this aspect will normally be addressed by the partners’ individual annual covers.One interesting area is plant. Generally the JV agreement will make provision as to how resources are to be procured. Often the plant will be provided by the partners but the JV might hire in the plant itself. Where it does so the JV will need to effect plant insurance and consideration will need to be given to how this insurance triggers some of the consequential loss cover that apply under the annual or contract works and DIC coverage. This is because plant loss can be the cause of considerable delay and where there are separate policies damage to plant may not trigger those extensions and thus affect the ability of the partners to claim.

Professional Indemnity

Where Professional Indemnity (PI) cover for the JV is concerned there are two options. The JV relies upon the policies that the partners each have in place or purchases a project specific policy.Both approaches have their shortcomings. Compared with an annual policy a project policy will generally be more expensive, provide more limited and won’t run for the entire period that the contractor has the liability. Therefore it will be necessary to replace it at some point within the liability period, by renewing it or purchasing new cover – if either option is available. For these reasons most JVs choose to rely upon the individual partner’s existing arrangements.

The benefits are that this is normally a cheaper option, offers a better scope of cover and, assuming both partners are still in existence, provides cover for the duration of the liability. It also means that there is an aggregation of the policy limits as because the partners are jointly and severally liable and will share the loss, the limits are effectively combined. The disadvantages are that just as the indemnity limits aggregate in the JVs favour, so do the deductibles. Claims handling can also be an issue and the risk of one partner becoming insolvent is still present.

Employer’s Liability

The first question to be resolved is whether the JV will have employees and generally the JV agreement is drafted in such a way that they do not, with all of the employees seconded from the partners into the JV. If this is the case then, arguably the JV has no need for Employer’s Liability (EL) insurance but this raises the question as to what happens where labour only sub-contractors (LOSCs) are employed or there are hired-in-plant operators. In each case, legally, they may be deemed to be employed by the JV. Even in the case of seconded employees there is a grey area. Clearly their contracts of employment are with the respective partners but, given that they are working under the direction and control of the JV management team, there is an issue as to whether the JV has a liability.Where the partners are entering into the JV agreement on the basis that the JV won’t have employees rigorous controls must be put in place to ensure that it doesn’t or there will be a need for the JV to purchase EL. This in itself may not be a straightforward process, for example, where the JV isn’t in possession of an Employer Reference Number (ERN), something that can be an issue with the insurance market.However, in the majority of cases the JV manages to adhere to the JV agreement, doesn’t take on any employees itself and deals with LOSCs and hired-in/agency operatives through the partners EL arrangements.


Other classes of insurance

The JV is a separate legal entity and can’t automatically rely upon the individual insurance arrangements of the partners so it’s necessary to assess what other provision the JV might need to make in its own right.In most cases the JV won’t have motor vehicles, but in certain cases it might, for example, BAM Nuttall is involved in a Managed Motorways JV for the Highways Agency and there is a large fleet of vehicles which requires the JV to have motor insurance in its own name.Some projects may have a marine exposure in the form of an uninsured transit risk and there may even be vessels that need to be covered.Will the JV own any property? In the case of a contractor probably not but PFI and special purpose companies may well have to have a property insurance programme in place.As far as other covers are concerned, PFI JVs will almost inevitably require Delay In Start Up (DSU) insurance. Other questions that need to be asked include; is there a money or fidelity exposure that needs to be covered and are employee benefits needed?

Where the JV takes on employees for longer-term ventures there may well be a need for life cover and medical insurance. Key man insurance is rarely taken but circumstances may arise where it is needed.For example, in the case of the Dartford River Crossing Bridge project there was one expert in cable-stayed bridges in the world at that time and he was 80.

ConclusionJV’s can work very well. But, in order to make a JV successful there is a need to:• be open and to deal with all of the issues

up-front. For example, the choice of which of the partners insurance brokers’ is going to work with the JV;

• treat the JV as a separate company and to analyse the risk and insurance requirements of that entity;

• ensure that processes and procedures are set up and communicated, from the outset;

• monitor carefully what the JV actually does to ensure that in important areas it does not veer away from the partners intentions by, for example, procuring plant and employing labour where these were not in the plan.



JOINT VENTURE CONTRACTING: PROFESSIONAL INDEMNITY INSURANCE ISSUES – ANDREW MARSH, PARTNER, DAC BEACHCROFT LLPAs we’ve already established, where Professional Indemnity insurance (PI) is concerned the options are for the JV to effect either a single specific project policy or to rely upon the partners individual annual policies. The choice of option is to some degree led by the structure of the JV. The merging or blurring of the lines of responsibility associated with an integrated JV structure means that a project specific policy is probably the best choice. Where there are clear distinctions, for example with one partner contributing the design and the other carrying out the construction, then it should be possible for partners to rely upon their own, individual policies. Similarly where the JV is incorporated, then this lends itself to a single project policy and where the structure is unincorporated, the tendency is likely to be towards a reliance on the covers of the individual partners.As we’ve already noted a key issue is that the partners are jointly and severally liable. Irrespective of the type of partnership involved each partner is responsible for the faults of the other and, in the event of the failure of one partner the other is left carrying full responsibility for the default.

The key ingredients of a Design & Construction (D&C) PI policyBefore looking in detail at the application of the available options and the pro’s and con’s associated with each, it’s useful to remind ourselves of the issues that an insurer will look at very carefully, because it’s important to appreciate that a D&C policy isn’t a guarantee, it’s not simply a case of going to an insurer and saying “we’ve had a problem with ‘x’ project, there’s been a collapse and the employer isn’t happy, there’s going to be some expense” and the carrier sending out an adjuster and then writing out a cheque, it’s far more complicated than that.

There are a number of real issues that an insurer will look at very carefully and it’s important to look at how the policy will work and, in particular what the insurer might seize upon, not just in the context of your policy but that of your partner’s too.They’re going to look at what they have insured you for. • The policy is covering you for your professional

activities and duties, “the services” that you carry out as disclosed in your proposal form, arising out of “the business” that you’ve described against a claim made against you, during the policy period – D&C policies are, of course, written on a ‘claims made’ basis.

• There will be a limit of indemnity which may be for each and every claim on an individual basis or an aggregate figure and there will be a deductible, an element that is not recoverable from the insurer.

• It’s an annual policy within which, potentially there will be a ‘retro date’ where the insurer has said “we’ll cover you against claims made arising from activities that you’ve done back to that point but we’re going to effectively draw a line in the sand and not insure you for those things you’ve done before that point.”

• There will also be very tight notification requirements during the currency of the policy. Normally this will be to notify the insurer of circumstances that are likely to give rise to a claim as soon as possible or as soon as practicable on order that the insurer’s position isn’t prejudiced by delay. This is likely to be a condition precedent to the insurer accepting liability for the claim.


Specialist Designers ExtensionWhere you are undertaking design and build projects and you have your own specialist sub-contractors, this will say that the insurer will cover you for your primary design liability whilst that’s being carried out by a sub-contractor but that you must ensure that your specialist sub-contractor has insurance up to a specific amount. Failure to do this can mean that the insurer is able to avoid liability.

ExclusionsProducts liability will be excluded. This exposure should be catered for under a public liability and products cover.There will also be an exclusion relating to ‘circumstances known at inception’. The proposal form will have asked whether you are aware of any circumstances that might give rise to a claim and if there where and these were not disclosed at the time the insurer can avoid the policy. In the case if JVs where there are a number of partners, it’s important to ensure that a proper check is made in respect of all of the parties.Particularly germane in the context of this paper, there will probably also be a ‘consortia and joint venture exclusion’ which will state that insurers will not insure you against any:

“liability arising out of your involvement in any joint venture, consortium or other profit sharing scheme unless a claim emanates from your acts or omissions provided always that we will not be liable for any claim made by any associated party within the joint venture, consortium or other profit sharing scheme unless such a claim emanates from an independent third party.”

So when you are acting in a joint venture, insurers will cover you only for your own default. You’re not insured for the default of your JV partners. The policy would cover you for cross-claims arising from partners but only where those claims

emanated from the insurer. If it’s an internal business or trade dispute between the partners which doesn’t involve a third party claim then the second part of that exclusion means there will be no cover.Insurance contracts are governed by a duty of good faith. That means there’s a duty, at inception, to disclose all material facts and, if that’s not done, irrespective of whether your insurer asks a particular question, then if a material fact comes to the knowledge of the insurer that, in its opinion would have caused it to rate the risk differently, it’s entitled to avoid the insurance. There are however, innocent non disclosure clauses in policies that effectively say “We’ll only send your premium back and avoid the policy if your non disclosure has been fraudulent. Provided you can show it was innocent or careless, an honest mistake, then the policy will still apply.”So, taking all of this together what you have and your partners have is a liability policy that, responds provided it’s triggered in time, has to do with the nature of the risk and it’s not excluded in the terms of the wording



The optionsWe can now look in more detail at the options.

The single project policy

Where the structure of the project is incorporated and integrated the key pro’s and con’s of using a single project policy are:Positives:

• A project policy provides the JV with clear, ring-fenced, specific cover and because there is only one unified policy it eliminates the possibility that gaps in cover will occur.

• It’s simple and straightforward to evidence to the employer.

• There’s a single unified response in the event of a claim from a third party that avoids potential disagreements on claims strategies.

• There will be a waiver of subrogation which helps with the avoidance of internal disputes that can otherwise be disruptive to team working.

Some thought needs to be given to the choice of annual or term cover. Design liability will extend beyond the contract term meaning that there will be a continuing contractual liability stretching into the future so there is a need to keep the policy alive. If the policy is annual then you are in the hands of the market, you don’t know what it is going to do in five years time or whether the project has been a success or has accrued claims which means that the cost is escalating.One option here is the purchase of a term policy. However the cost can be prohibitive.Negatives:

• A project specific policy is more expensive that purchasing separate policies.

• The availability of market capacity for such covers can be an issue.

• The breadth of the cover will be narrower, more specific.

• There are issues surrounding the contract term. The key ones being the question of whether the cover going to be available year-on-year and the uncertainty surrounding the cost of cover, particularly where there is a deteriorating claims experience.

Individual policies

Where the structure of the project is unincorporated and non-integrated then, given the additional cost and reduced cover provided by a single project policy, provided that the roles of the partners are clear and distinct, they may opt to rely upon their own annual policies:Positives:

• A more cost effective option.• There is a familiarity with the cover. Insurers

are aware of the business, what it does and how it does it and there is likely to be a longstanding relationship that can be beneficial.

• There’s no cross-contamination of the individual partners claims experiences and hence no potential adverse impact on their policy rating.

Negatives:• There will be differing levels of cover. Partners

may have different limits of liability and one might have an aggregate limit that would affect its ability to contribute in any claims situation. Levels of deductible will also vary depending upon the attitude of the individual partners to the levels of risk retention they are prepared to take.

• Reliance upon individual policies also makes the process of evidencing the cover which the JV has in place to the employer more complicated.

• Where there are two insurance programmes there are two sets of insurers, two sets of lawyers etc., and this can make agreeing strategy in the event of a claim, and the resolution of internal disputes more difficult.


The joint and several liability of each of the partners and the impact of the Joint Venture Exclusion Clause can lead to circumstances where, in the event of a catastrophic loss a partner is exposed to significant uninsured losses if it hasn’t insured the exposure itself and the partner defaults or becomes insolvent.The question that must be asked is not just “how well do you know your partner in terms of its financial solidity and solvency?”, but also “how much do you know about the detail of its insurance arrangements?” It’s important to obtain confirmation that there is valid insurance in place. For example, has the partner described its business properly to insurers? If this hasn’t been done then, potentially the partner isn’t insured for the activities being undertaken in the JV.Other areas that need to be properly investigated and understood are the limit of indemnity, the level of excesses/deductibles and any aggregate limits that might impact upon a policy’s ability to respond in the event of a claim.Where the notification of claims is concerned a failure to notify the insurer promptly can prejudice the cover, so it’s important to consider whether it’s necessary to put in place a mechanism

to ensure that where a claim or potential claim does arise each partner is made aware that notification to the insurers has taken place.Does the partner have ‘onerous’ terms in its policy? It would be useful to know if there is a specialist designer’s extension and, if so what steps are taken to ensure that sub-contract designers have the required cover in place.The cover is going to be required over an extended period of years and changing market conditions over time will undoubtedly affect the shape and nature of the cover insurers are prepared to provide so, it’s important to ensure that the answers to all of the above questions are kept up-to-date. Making sure that the partner’s policy is still positioned to respond to a claim well into the life of the project demands a high degree of risk management and due diligence on an ongoing basis.

ConclusionThe reality is that there are no hard and fast rules. It’s necessary to make decisions on a case-by-case basis having given full consideration as to all of the circumstances because in the event that a partner’s cover fails to respond the other partner is going to have to bear the consequences.



Arthur J. Gallagher

Walbrook OfficeThe Walbrook Building25 WalbrookLondonEC4N 8AW

Tel: +44 (0) 20 7204 6000Fax: +44 (0) 20 7204 6001

www.ajginternational.com

Arthur J. Gallagher (Specialty) is a trading name of Arthur J. Gallagher (UK) Limited which is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 1193013. www.ajginternational.com