Vicarious Liability and How Insurance Can Protect Your Franchise System

January 9, 2013California

In the January edition of Franchise Times, there is an illuminating article on a vicarious liability case pending in California. In it Domino’s corporate is being sued by an individual for an issue that happened at an independently owned California franchise location. At issue is how much control the franchisor had over the franchisee’s decisions and operations and whether or not the franchisor can they be held liable for issues that happen in franchisee stores. Another issue affecting this situation is the fact that the franchisee filed for bankruptcy protection.

I don’t wish to weigh in on the legal ramifications of this issue, and what any potential rulings might mean. I do, however, want to stress that this demonstrates the importance of having properly written business insurance requirements in the Franchise Disclosure Documents (FDD), having the franchisor listed as an Additional Insured on franchisees’ policies, and, ideally, having a system-wide insurance program. Having proper insurance in place and being listed as Additional Insured on a franchisee’s policy provides franchisors, at the very least, with coverage for defense costs incurred fighting this claim/case. In many instances the defense costs are the largest expense, even if ultimately you are removed from any liability.

I’ve spoken with more and more franchisors over the past year who have been involved (or potentially involved) in a vicarious liability claim who now clearly understand the benefits and value that a system-wide business insurance program can provide. This can reduce risk to everyone in the franchise system.

Consistent and adequate insurance protection, FDD insurance compliance, better pricing, and a deeper understanding of your exposures are just a few of the way a properly designed franchise-wide insurance program can reduce your risk. If you’d like to learn more about your vicarious liability exposure and how we can help you to reduce and prevent that exposure, please do not hesitate to reach out to me.