Keys to Structuring the Proper Insurance Requirements in a (Potentially) Joint-Employer World

March 16, 2016

Franchising has thrived for decades because, as the adage goes, “Owning a franchise allows you to go into business for yourself, but not by yourself.” This model has provided the structure for franchise owners to successfully grow and expand their businesses.

However, the recent joint-employer ruling by the National Labor Relations Board (NLRB) has the potential to unwind and upset decades of growth and expansion and threaten the successful franchise model. I will not address the potential economic or legal impact of this ruling, but will instead discuss what, if any, insurance coverage is available to help protect against this potential risk.

The exposures that come from this joint-employer ruling can affect franchisors across multiple lines of coverage. However, the biggest impact will most likely be felt in the employment practices liability (EPL) and franchisor errors and omissions (E&O) insurance lines. As a refresher, EPL claims arise from allegations of wrongful termination, discrimination, harassment, retaliation and other related workplace disputes. These exposures are commonly addressed by franchisees carrying an EPL insurance policy to protect against such claims by past, current or prospective employees. Franchisor’s E&O insurance coverage, on the other hand, can protect franchisors for their actions—or inactions—that allegedly cause financial harm to their franchisees.  

So, what exactly are the best ways to address joint-employer and employment practices issues through franchise system insurance requirements? Here are some recommendations and things to keep in mind.

Employment Practices Liability Insurance (EPL)

  • First, it is more important than ever that franchisees carry employment practices liability (EPL) insurance. This provides defense and indemnification coverage for employee and third-party claims for those types of allegations mentioned above. Increasingly we recommend this coverage be listed as a necessary coverage on FDD insurance requirements.

  • Bear in mind that “additional insured” status for the franchisor is not something that insurance carriers are adding to franchisee EPL insurance policies. Doing so could expose the insurer to claims by franchisor employees under the franchisee’s EPL policy. As such, there is a potential coverage gap for the franchisor should the franchisor get pulled into a franchisee’s employment practices claim. Many carriers will, however, provide a defense sublimit on their policy for the franchisor should they be brought into a franchisee’s EPL claim. This is a very good starting point and one thing that should be added to your FDD insurance requirements. Historically, this defense sublimit was generally enough to remove the franchisor from the claim since the employee was not a franchisor employee.

  • Going forward, insurance carriers are monitoring the joint employer issue carefully to determine if and how their insurance policies should change to address this exposure. Since these policies are typically designed by evaluating years of established claim data, insurers are slowly and cautiously dipping their toe into the joint-employer pool. 

  • With that said, there are a few carriers today that will provide a sublimit of coverage for the franchisor under the franchisee’s EPL policy for joint employer issues. These policies will carry certain exceptions (such as wage and hour claims) and/or cover only specified perils. While we do see a few carriers trying to proactively address this, there is trepidation on their part for full joint-employer coverage primarily because these employees are employed by the franchisee. Again, because insurance carriers are not certain where and how this issue will eventually settle, most are entering this arena cautiously because their potential exposure is large and there is no equitable way to price for it today. Those carriers that do provide some coverage for joint employer issues limit their exposure by offering a sub-limit of coverage under the franchisee’s policy. 

  • Lastly, in many cases, franchisors should carry their own employment practices liability insurance coverage as well. This is good standard practice to provide coverage for any employee or third-party discrimination suits you may face. Additionally, it could provide a fallback if the courts determine you to be a joint employer. There is a significantly higher exposure for franchisors than for the franchisee.

Franchisor’s Errors and Omissions Insurance (E&O)
The NLRB’s joint-employer ruling may bring about issues and changes to the franchisor-franchisee relationship. These might not only affect employment practices liability claims, but could potentially affect your franchisor’s errors and omissions coverage. (Here is a primer on franchisor’s E&O coverage and why it is important.)

  • The professional services definition we recommend on a franchisor’s E&O policy typically says “in performance of franchisor services.” That’s your role, and the definition is broad for a reason: to cover as many of your franchisor services as possible.

  • We see the possibility of a joint-employer liability issue arising out of the performance of franchisor services if a franchisee suffers financial harm as a result of following the guidelines set forth by the franchisor. 

  • Frankly, we do not know how joint-employer claims might be filed in the future, but the potential exists for them to be addressed through a franchisor’s E&O policy.

Concluding Thoughts
It’s important to keep in mind that another potential negative to the insurance policies is that this ruling may affect the pricing for both EPL and E&O coverages. Should you, as a franchisor, have to pick up this additional exposure, the insurance carriers will price for it.

While these increased exposures will ultimately be addressed in greater detail by the insurance industry, it is important to know that there are potential significant gaps in your, and your franchisees’, insurance coverage today due to these issues.

In the end, joint employer and vicarious liability risks are just two of the increased exposures facing franchisors today. This is another reason why it is so important to review the insurance requirements in place for your franchisees and update them to reflect the changing times. Done correctly, this will better protect you, your franchisees and your brand.