Top Four Ways Vicarious Liability Affects Franchisees

November 8, 2012

For the millions of you following my blog, you just finished my article on the importance of preventing and reducing the vicarious liability exposure that franchisors face in today’s litigious environment.

“Outstanding stuff!” you say, “But what if I’m a franchisee? Why does vicarious liability matter to me, and should I even care? Isn’t this just a concern for the franchisor?” Well, in fact it is an important issue for franchisees, and the more steps you take to prevent these issues from happening, the healthier your business and the franchise system as a whole will be.

As a former franchisee myself I saw how this issue affected my franchise system first hand. Here are a few ways that vicarious liability issues also affect franchisees.

  1. A Franchise Brand is Made of Strong Franchisors AND Franchisees: It takes both to make it work. I personally have a strong affinity for the health and success of franchisees. Franchisors that get unnecessarily pulled into vicarious liability issues and claims arising out of franchisee practices inevitably have to take valuable time away from building the brand, improving operational efficiency and growing unit economics to address these claims. That’s not good for anyone.

  2. Other Franchisees Can Harm Your Business: We’ve seen some recent high profile actions at the franchisee level (e.g., Domino’s, Jackson Hewitt and others) that have greatly affected consumers’ trust in the brand, and have absorbed significant time and resources from the franchisor. This can have, and has had, a negative effect on revenue at the franchisee level. Don’t think because you may be in Omaha and the issue happens with a Phoenix franchise location that you are immune from the after effects. Your revenue could drop for a period of time because of negative publicity.

  3. Instant Feedback: Ratings, reviews and likes/dislikes are now part of our everyday vocabulary through blogs and other social media. Your brand can be significantly affected should a claim be handled in a negative fashion, and the publicity gets broadcast across the Internet, again leading to reduced revenue or poor public perception. Additionally, it could be something as “innocent” as you or an employee posting a message on a social media site that goes viral for which you may not have insurance coverage.

  4. Inadequate Insurance Coverage: I have seen far too many franchisees with wrong or inadequate insurance coverage find out only after a claim occurs. Unfortunately, at that point, they either have to pay the costs themselves or, in a worst case scenario, close their doors. This affects your business first and foremost and takes you away from what you enjoy doing, which is growing your business. However, it also affects you as a result of the franchisor needing to step in and, possibly, paying out of pocket for an issue that happened at an under-insured franchise location.

Vicarious Liability is a very important issue that impacts the health of the entire franchise system. By acknowledging and addressing this issue jointly, franchisors and franchisees can increase the strength of their system and prevent and reduce the risk of this exposure. Building a system where vicarious liability is addressed systematically will bring other unique advantages to the brand such as a stronger culture of trust and communication.

In the end vicarious liability is an issue that affects all and it starts with an analysis, identification and plan to address risk and exposures throughout your system. Of course, it doesn’t hurt to work with a Risk Management Specialist that focuses on the franchise industry.