Doug Imholte
VP, Business Insurance Producer
Franchisors continue to face potential exposure from vicarious liability claims. Vicarious liability is the risk that a franchisor could be named in a claim tied to a franchisee’s actions or an incident at a franchisee location. These claims are often expected to fall under the franchisee’s insurance policies. However, not all policies are created equal, so some exposure may still remain for the franchise system.
Today, vicarious liability claims against franchisors can affect nearly every area of the franchise system, such as:
- Franchisee auto and driving exposures
- Personal injury to a customer
- Food-borne illness
- Product liability
- Abuse or molestation allegations
- Data privacy and ransomware events
These are just some of the risks that can create claim issues for a franchisor. Franchisors should recognize these factors and put a plan in place to help manage vicarious liability exposure. The five steps below can support a system-wide risk management approach.
1. Identify and mitigate risk
Start by identifying the exposures that are unique to your model and developing a plan to manage them. For example, does your system work with kids? Is delivery involved? Do you sell products, prepare food, or hire large numbers of employees? Do you handle personal data from clients, go into customers’ homes, or provide personal services such as hair removal, massage, or facials?
These are different risks that can affect your brand and, depending on the circumstances, may increase exposure for the franchisor if they are not addressed appropriately. Insurance is not a one-size-fits-all solution, so it is important to address key franchisee exposures.
2. Write clear insurance requirements
Many FDDs do not list the full insurance requirements for a system. Too often, they simply say that the franchisee needs to get insurance that is acceptable to the franchisor. That is a good starting point, but today the franchisor may need to be more specific about the coverages required of franchisees.
Clear, tailored language should be included in the FDD and operations manual so everyone understands what coverages need to be in place. Without that clarity, franchisees and the franchisor may face added risk.
3. Track and manage compliance to these requirements
Once you have well-defined insurance requirements, the next step is to monitor compliance. The franchisor should track franchisee insurance programs to help confirm they remain aligned with those standards.
One common way to do this is to collect certificates of insurance and review them to help confirm that coverages and limits are in place and that the franchisor is listed as an additional insured, where appropriate.
4. Manage the insurance program centrally
For some franchisors, these steps may seem overwhelming to implement across an entire franchise system. But centralization and alignment can help simplify administration.
There is value for franchisors and franchisees when they work with a franchise industry-focused insurance broker to help manage the insurance program. Some potential benefits include one place for all the certificates, more consistent coverage and communication, coordination with a single carrier, and better access to claim trends and possible solutions to address future risks.
Multiple brokers can create different processes and potential misalignment that may add more complexity for the franchisor over time.
5. Communicate with franchisees
Proactive communication with franchisees is vital and helps support a healthy and successful system. The same is true for a tailored insurance program.
It is important that franchisees understand the strategic benefit to them and to the brand of a well-designed insurance program. Incidents, claims, and lawsuits that affect the system can impact everyone and may lead to business disruption, lost time, and financial strain for franchisees.
In today’s franchise environment, a well-thought-out, designed, and implemented franchise insurance program can play an important role in supporting risk management and compliance. It may help franchisors and franchisees better manage exposure across the system.
What vicarious liability exposures are you most concerned about in your franchise system? Which risks could have the greatest impact on your business? To discuss these concerns and explore ways to strengthen your insurance and risk management approach, reach out to the Marsh McLennan Agency Franchise group.
