The following article is featured in the January 2020 Franchise Journal Magazine on page 136.
A growing trend in franchising is the increase in vicarious liability claims arising against the Franchisor for alleged negligent acts that occur at a Franchisee’s location. There are multiple risks inherent to Franchisors, and the Franchise brand, as a result of the franchise model. As Franchisors, it’s important to recognize that risk exists and put a plan in place to help reduce your vicarious liability. Let’s look at how structuring and implementing a system wide franchise insurance program can help protect your system.
- Mitigate Risk: Identify those exposures that are unique to your model and put a plan in place to manage and mitigate those. For example, does your system work with kids, is there 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 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 your brand to risk if you don’t address your key franchisee exposures.
- Write Proper Insurance Requirements: Most of the FDD’s I read do not list proper insurance requirements for that system. Too often it simply says that the Franchisee needs to get insurance that is acceptable to the Franchisor. In today’s world the Franchisor needs to provide better clarity as to what insurance is required by the Franchisees. Proper, detailed and tailored language needs to be in the FDD and Operations Manual with respect to what coverages need to be in place. Not doing so exposes your Franchisees and you as the Franchisor to undue risk.
- Track and Manage Compliance to these Requirements: Having well-defined insurance requirements is not enough; you need to track the Franchisees to maintain compliant to 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: There is real value to the Franchisor and Franchisees to having a Franchise industry-focused insurance Broker managing the insurance program. 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.
- Communication to the Franchisees: Proactive communication to the Franchisees is vital and helps maintain a healthy and happy system. 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 impact everyone and can result in loss of business, time taken away from other valuable activities, to Franchisees that go out of business as a result. In today’s evolving franchise environment, a well thought out, designed and implemented franchise insurance program is more important than ever. It can make a difference for you and your Franchisees.
For specific question regarding Marsh & McLennan Agency’s Franchise Insurance Program, reach out to Doug Imholte at (763) 746-8221 or firstname.lastname@example.org