We seem to have been inundated recently with news about rulings, legal cases and articles that all, at some level, attempt to address the state of the franchisor/franchisee relationship. (Although from my perspective they appear about as clear as mud). What we are seeing, however, is a trend toward trying to hold franchisors vicariously liable for the acts of their franchisees and/or for incidents that happen in a franchisee’s location.
As a result of this I’ve received quite a few questions lately as to how to structure an insurance program to protect your franchise brand and reduce your vicarious liability. I’ve written about this vicarious liability issue before, and, while I always focus first and foremost on a broad risk prevention program for the franchise system, the right insurance coverage does matter.
There are multiple risks that are unique and inherent to franchisors, franchisees and the franchise brand as a result of the business model. Franchisors would be well advised to recognize that, and put a plan in place to reduce vicarious liability. Let’s look at how structuring and implementing a system wide franchise insurance program can help protect your system.
- Identify & Understand Your Unique Risks: The first thing to do is to identify those exposures that are unique to you, and put a plan in place to manage and mitigate them. For example, does your system work with kids? Is their delivery involved? How about selling products, food preparation or hiring lots of employees? Do you handle personal data from your clients, go into customer’s homes or provide personal services such as hair removal, massage or facials? All these are different risks and can expose your brand—and potentially you as the franchisor—to these risks if not insured properly. Insurance is not a “one size fits all” commodity, and you are exposing yourself and your brand to risk if you leave this to chance. Granted, you, as the =franchisor, may not be providing these goods and services (you are simply selling franchise licenses after all), but that doesn’t mean that you won’t get pulled in on a claim or law suit.
- Write Proper Insurance Requirements: Most of the FDDs I read do not list proper insurance requirements for their system. Too often they simply say that the franchisee needs to get insurance that is acceptable to the franchisor. In today’s world the franchisor needs to provide better direction as to what insurance is required by the franchisees. Proper, detailed and tailored language needs to be in the FDD and operations manual with respects to what coverages need to be in place. Not doing so exposes your franchisees and you, as the franchisor, to undue risk. Don’t take shortcuts.
- Track & Manage Compliance to these Requirements: Having well defined insurance requirements is not enough; you need to track the franchisees’ compliance of these standards. The best way to do this is collect their certificates of insurance to make sure coverages and limits are in place and the franchisor is listed as “Additional Insured.”
- Manage the Insurance Program Centrally: While this will appear self-serving, there is real value to the franchisor and franchisees in having the insurance program, carrier negotiations, policies and certificates managed by an insurance agent or broker focused on the needs of the franchise industry. Some of these benefits include one place for all the certificates, consistency of coverages and communication, leveraging this program with one carrier and gathering claim trends and identifying solutions to reduce future risks and claims. By gathering trends and loss details, you can work together to prevent these losses from happening in the future.
- Communication to the Franchisees: As a former franchisee myself, I believe proactive communication to the franchisees is vital and helps maintain a healthy and happy system. I appreciated when my franchisor communicated to me why a program they were implementing was important to the brand and, as a result, I was much more likely to fall in line. The same is true for a tailored insurance program for your system. It is important that franchisees understand the strategic benefit to them and to the brand of a well-designed and tailored insurance program. Incidents, claims and lawsuits that affect your system affect everyone and can result in lost business and wasted time taken away from other valuable activities, and even franchisee closures.