Warning: Non-Compliance With FDD Insurance Rwquirement Can Expose A Franchisor to Vicarious Liability Issues
When I begin working with a franchisor, I always ask their thoughts on the importance of FDD compliance. In all cases the answer is the same: Franchisee compliance with the FDD is very important and is seen as a necessary way to manage and grow the franchise system. Being an insurance guy, I then get more specific and ask about their franchisees’ compliance with their FDD insurance requirements and whether that it is important. Of course, they say, as it helps maintain the consistency across the brand they need. However, over 80% of those I speak with do not maintain a regular method or system to ensure that insurance compliance is happening. Unfortunately, that could mean disaster for the franchisees and franchisor alike.
Too often, insurance requirements and their compliance are treated like the red-headed step children of the franchise system (my apologies to all red-headed step children out there). They are there but not really noticed or cared about until something bad happens. The fact is that franchisors are exposed to vicarious liability issues based on the acts of their franchisees and employees. For example, do you want to find out a franchisee had inadequate insurance limits or improper coverage after the actions of a franchisee or their employee bring about a significant claim? Of course not, especially since you are more than likely to be brought into any lawsuit that should occur.
Franchisees can also be affected if their fellow business owners don’t have proper insurance limits, per the FDD. Certainly the whole brand takes a hit if something happens to a franchisee or the franchisor. If a franchise owner is forced to close his doors because of a claim that was not covered it can have an impact on other franchisees across town or across the country through reduced business and negative PR.
So, how do we fix this?
One of the first things we do is audit a system’s FDD insurance requirements based upon what they actually need. This includes a thorough review of the business model, franchise support and other key risk factors. Having a franchise-focused insurance broker do this is important because they better understand how to spot red flags.
Next we review the franchisee certificates of insurance (COIs) on file to determine compliance with such basics as Additional Insured status and limit requirements dictated within the FDD.
It’s also critical to match the right coverage to the main risks of your business model. Consider: Does your business model carry a professional services risk? How about employees driving, or in-home care, or serving alcohol? All of these are unique risks not normally contemplated within a standard General Liability policy. It is important to have an insurance broker focusing on franchise issues review your business model to detail the right language for the FDD.
Getting your franchisees to comply with FDD insurance requirements is the first and often best step in effectively reducing risk to your system. Don’t get hit with a vicarious liability issue because you failed to take this important step.