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About Franchisor Insurance

Preamble

This content is independent of any content coming from insurance brokers, insurers, law firms, or other insurance lobbyists. Commercial insurance is rarely taught in schools, and when it is, it’s mostly done through the lens of brokers or insurers. There are many misconceptions around Franchisor Insurance, like many other topics in commercial insurance, due to bad habits acquired through the over reliance on insurance brokers or insurers or information providers who are lobbied by them. It is also important to note that insurance has both an operational aspect and a legal aspect, on which we put weights of 95% and 5% respectively in terms of importance to protecting a business and its investors (the point is that going to court to enforce coverage defeats the purpose of buying insurance, so you want to make sure that whatever insurance you buy protects your business right, based on operational data, and pays out fast on large losses).

Franchisor Insurance

It consists of various types of commercial insurance that are specifically designed to protect a franchisor from different forms of Operational Risk. Franchisor Insurance includes but is not limited to the following:

·     Directors’ & Officers’ Liability Insurance (D&O)

·     Professional Liability Insurance (E&O)

·     Commercial General Liability Insurance (CGL)

·     Property Insurance

·     Cyber Insurance

·     Credit Insurance

·     Other types of insurance depending on the nature of the franchisor

If you are a franchisor carrying one or more of the above-mentioned types of insurance, feel free to request a proposal from our team for quotes on analytics or management of your insurance independently of any broker or insurer (it's a quick 1 step process). Our team has deep experience with franchisor insurance including the structuring of franchisee insurance programs from scratch. 

Franchisor Business Insurance

Please refer to the section above.

Franchisor Insurance Coverage

The coverage provided by franchisor insurance largely depends on how it has been reworded to match the operational data of the franchisor. For instance, if the franchisor bought insurance directly from a broker or insurer, the policy wording would not be tailored accordingly, as a result coverage would be limited to standard terms and conditions that the insurer had initially drafted. This is dangerous for the franchisor because such insurance would have a low payout ratio (< 25% on average), would not be relevant to the franchisor’s operations, and would be more costly in terms of direct premiums paid as well as the cost of risk that was not eliminated due to the poor protection offered by such franchisor insurance.

A risk expert independent of brokers and insurers must be involved in rewording and clinically triggering the insurance policy for effective results. This is regardless of the type of franchisor insurance per the list shown above.

Franchisor E&O Insurance

This is one of the most important types of franchisor insurance simply due to the fact that the franchisor faces Liability Risk from several parties including its own franchisees, customers, as well as third parties such as landlords or service providers. Depending on the jurisdiction in which the franchisor operates, they may be subject to franchisee rescission claims, which must be covered by the franchisor E&O insurance. Moreover, the insurance must be analyzed carefully, word by word, by risk experts independent of brokers and insurers. Contact us if you are looking to procure franchisor E&O insurance.

Franchisor Errors & Omissions Insurance

This is the same as Franchisor E&O Insurance, it’s just named differently. Please see the section above for more information.

Franchisor Professional Indemnity Insurance

This is the same as Franchisor E&O Insurance, it’s just named differently. Please see the section above for more information.

 

Franchisor Insurance and Risk Management 

Each type of franchisor has its own unique operations and corresponding data, it is therefore important for risk management and insurance to be tailored accordingly. It is also highly recommended to centralize the risk management and franchisor insurance as it relates to larger franchisors with operations in multiple jurisdictions. You can refer to our case study for a preview of some of our work on a franchisor client of ours within the food & beverage industry.

 

Franchisee Insurance 

Most of the time, a franchisee is required by the franchisor to purchase specific types of commercial insurance. This insurance requirement should be included within the Franchise Agreement. The requirement is different from one franchisor to another depending on industry and nature of operations. It is important for the franchisee to fully comply with the franchisor insurance requirements, which entail technical insurance obligations that cannot be met through the simple purchase of insurance directly from brokers and insurers. A risk expert independent of brokers/insurers must be involved in the procurement and management process of the franchisee insurance.

Depending on the size and sophistication of the franchise, a franchisee may be subject to participation within a franchisor insurance sponsored program that offers standard terms and conditions across all franchisees.

Franchise Insurance

This broadly describes insurance that is relevant to both a franchisor and its franchisees. In other words, Franchise Insurance includes Franchisor Insurance and Franchisee Insurance. Please see the above sections for more information keeping in mind that there is no one standard franchise insurance policy.

 

Franchise Insurance Programs

It is highly recommended for a franchise to create an insurance program for its franchisees as it would provide standard terms and conditions, in addition to cost savings, to the franchisees. In addition, a standardized way of protecting franchisees offers greater protection to the franchisor from a credit risk standpoint (ie. the franchisor’s revenue stream consisting of franchise fees, royalties, product revenue, etc., would be more secure when the franchisees’ operations are better protected against various types of Operational Risk).

 

Franchise Insurance Requirements

It is important for the insurance requirements within a Franchise Agreement to be clear and reasonable for the franchisees. Many times, franchisees seek the help of the franchisor in leasing physical properties for which there are landlord insurance requirements, which must also be contemplated when drafting franchise insurance requirements.

 

Franchise Risk Solutions

Risk solutions to franchises should be divided into 2 categories:

(1) Risk assessment and management, which includes the measurement of different types of franchise risks (ex. probability of occurrence and currency impact of cyber risk). This also includes any recommendations and corresponding implementations of controls to reduce the initial measurements of franchise risks.

(2) Insurance management, which includes the rewording and management of franchise insurance, which includes both franchisor insurance and franchisee insurance. This must be done by risk experts independent of any insurers or brokers to ensure the franchise insurance has a high payout ratio, is operationally relevant, and is provided at the most cost effective levels.

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