Five Key Guidelines to Writing Proper Franchise Insurance Requirements

March 27, 2013

For the past five years, I have been helping and guiding franchise systems with risk management and insurance program development and implementation. In that time, I’ve learned that virtually all franchisors agree on the importance of franchisee compliance with franchise system requirements and standards. Those who have invested resources improving compliance issues, also agree that things seem to run better system-wide.

Yet, one area in particular does not seem to get the same attention, and can leave both the franchisor and franchisees with significant exposures: Compliance with the FDD insurance requirements. Let’s address the proper ways to write and manage franchise insurance requirements.

First off, here’s what not to do:

Note 4 (Insurance): Before you commence operations of your ____ location, you must purchase and maintain at your expense at all times during the term of the Franchise Agreement the insurance coverage required, including comprehensive general liability insurance, property & casualty insurance, business interruption insurance, statutory workers compensation insurance. If you fail to obtain or maintain the required insurance, we will have the right and authority (but not the obligation) to procure the required insurance and to bill you for it.

This is a real FDD insurance requirements statement I came across recently. The biggest problem is that it’s just too darn vague. It doesn’t spell out the required types of coverage, leaves out necessary limits, and doesn’t address whether the franchisor needs to be an additional insured. These are all important things that, if left undone, could leave the franchisee, the franchisor and the entire system exposed to unnecessary risk.

SO, for those of you still with me, here are the key components to writing proper FDD insurance requirements.

  1. Know Your Risks: What are the products or services your franchisees are providing? Is there driving involved? How about going into homes or businesses, or taking control of other’s property? Is there a high amount of turnover among the employees, do you provide professional services, etc? These are just a few examples illustrating that. whatever your business model. the first step is to fully understand what and where your risks are so you can address these by writing the proper requirements that reduce risk.

  2. Be specific: As the above example illustrates there is no mention of what type of risk you are protecting against. Insurance is NOT generic and, for example, not all general liability policies are created equal. Once you identify and understand your risks, you should write insurance requirements language that is designed to protect your franchisees should one of these risks occur. (Your best protection as a franchisor is making sure your franchisees are covered properly). My suggestion is to list those individual coverages you need depending upon the identification of your risk. For example, items like host liquor liability, sexual abuse and molestation, delivery drivers (owned and non-owned auto), crime, employment practices and other issues should be listed individually.

  3. Track, track, track: Telling franchisees they must do this and not following up is on par with telling your kids to clean their room and not following up. (Yes, I’ve been battling my teenage daughter lately over cleanliness lately.) Franchisees must know why insurance requirements are important and that you are tracking them. You should annually require that all franchisees send in their certificate of insurance to you and you should review them to make sure they are in compliance.

  4. Be listed as Additional Insured on franchisees' policies: This provides coverage for you under their policies, to the term of limits, should you, as the franchisor, be pulled into a claim arising out of a franchisee’s location.

  5. Work with an insurance broker with franchise industry expertise: Just as you don’t have your estate attorney advise you on franchise legal matters, you shouldn’t have your “one size fits all” insurance agent advise you on setting up and managing a franchise insurance program. Find an insurance professional with the background, experience and knowledge to advise you and your franchisees on how to properly protect your investments and your future.

As you can see I am passionate about this issue. I see it as part of the everyday fabric of execution that franchise systems need to complete to be successful and reduce risk as they grow.