Why You Should Care About FDD Insurance Requirements and Franchisee Compliance

November 20, 2015

Alright, let’s discuss two of the most riveting topics in franchising today: writing Financial Disclosure Document (FDD)) insurance requirements and managing system wide compliance to those requirements. Ok, maybe excruciating, frustrating and apathetic are more like it, but it’s well established that maintaining franchisee compliance with the correct insurance requirements is increasingly important in protecting your brand and reducing your vicarious liability exposure.

The challenges for many franchisors are figuring out what insurance requirements they need and, once they are written, effectively enforcing them. Obviously there’s nothing to enforce until requirements are drafted, so to get you started, here are five key things to consider when developing your franchisee insurance requirements.

  1. Have your FDD insurance requirements written by a reputable franchise industry insurance broker. No offense to my franchise attorney and consultant friends, but just as I shouldn’t write an ops manual or Item 19 in the FDD, they should not write your insurance requirements. Too often I see FDD language that is boilerplate, vague, incorrect, or all of the above.

  2. Tailor the insurance requirements around the products and services your franchisees deliver, not what you do as the franchisor. Your professional franchisor services are covered under a franchisor’s E&O policy.

  3. General liability insurance does not cover everything. Contrary to its name, your general liability (GL) policy has limitations. GL primarily covers bodily injury and property damage, and can include coverage for personal/advertising injury and products and completed operations. It does NOT cover harassment, discrimination, wrongful termination claims, data privacy issues, third-party crime against clients, professional liability for services performed and many others. Too many franchise owners miss this point and don’t understand until they have filed a claim that they are not adequately covered under a standard GL policy.

  4. Additional Insured status is important and should be tracked. Often this is the first thing that gets overlooked as franchisees’ policies renew each year. To have coverage extended to you under the terms of a franchisee’s policy, you need to be listed as an Additional Insured or you can end up paying out of pocket. 

  5. Don’t over-insure. Structuring your program is important, and requires significant due diligence. Well-designed and property tailored insurance requirements require an understanding of the franchise model in general and your specific activities (and risks), in particular. 

Well-designed insurance requirements don’t mean much if the franchisor does not enforce them or they are not managed appropriately and consistently. For those requirements to be followed and maintained, there needs to be a strong compliance process in force. Here are three important suggestions for maintaining compliance.

  • Communication and Education: Having been a franchise owner myself, I admit that I was much more likely to follow compliance guidelines when the franchisor clearly explained their importance and helped me understand why. Insurance compliance is not just important to the franchisor, but to the franchisees as well. This should be clearly and regularly communicated.

  • Tracking certificates of Insurance: You, often with the help of your insurance broker, should maintain annual records of franchisees’ insurance certificates and compare those against the insurance requirements. If they are not in compliance, appropriate measures should be taken to get them back into compliance.

  • Enforcement: I’m not going to suggest that being out of compliance with insurance requirements should lead to default; that’s a bit harsh. I do know, from my days as a franchise owner, that franchisees that are out of compliance in one area are more likely to be out of compliance in other areas as well. We recommend the following to our clients needing help with enforcement:

    • Communicate openly and warn non-compliers. I think this is the first and best approach. The franchise insurance broker managing your insurance program should inform you, ahead of your renewal, of any franchisees not in compliance. Direct communication at this point from the franchisor may get them to fall in line.
    • Charge a compliance fee if franchisees put the system and brand at risk. A number of my clients charge a fee to those franchisees that can’t prove they are in-line with the insurance requirements. It’s an appropriate way to enforce the issue.
    • Put the insurance in place for them. Check with your franchise legal counsel first for guidance, however, you can design compliance language to put the proper insurance in place and have the franchisee billed for it. 

While perhaps not exactly riveting, these items are important to protect your franchise brand. They will help to reduce your vicarious liability, maintain consistency and allow you and your franchisees to focus on growing your business. And that, after all, actually is riveting.