To buy, renew, reword midterm, or trigger any type of Franchisor Insurance: contact us. We contractually guarantee lowest cost within the global insurance marketplace for tailored coverage that we structure independently of any insurance broker or lobbyist. DeshCap is ranked #1 for Liability Risk worldwide and Top Operational Risk Advisor.
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
· 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 Market Updates
Due to the general hardening of the commercial insurance market around the world, premiums for Franchisor Insurance have been on an upward trend with no real end in sight. This underwriting cycle can last up to 7 years. This is exacerbated for Franchisor Insurance as opposed to other commercial insurance products as insurers shun franchise businesses using a broad brush approach, which does not differentiate between a franchise business that has a relatively low risk profile versus one that has a relatively high risk profile.
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. In addition, it is important to keep updated with market dynamics impacting franchisor insurance coverage. For larger franchisors, it is recommended that their insurance coverage be reviewed and updated on a quarterly basis.
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 programs should be structured carefully with the right broker and insurer partners along with a framework that is tailored to the nature of the franchise.
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. The insurance requirements within the FA as well as corresponding material should be updated at least once a year to reflect changing operational trends and insurance market dynamics.
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.
Franchisor Insurance FAQ
What Is Franchise Insurance
It is insurance that is relevant to franchised operations including franchisor insurance as well as franchisee insurance, which ranges from property insurance to protect the physical buildings, content and equipment, and other materials used within a franchise to liability insurance protecting a franchisor or franchisee from third party liabilities from their clients, landlords, suppliers, and other third parties. It is important to tailor the fine print of any type of franchisee or franchisor insurance based on the operations at hand.
Franchise Liabilities
These include but not limited to the following:
- Liability from a Landlord (ex. not complying with insurance provisions within the lease)
- Liability from an industry body
- Liability from customers (ex. faulty product sold resulting in injury to the customer)
- Liability from shareholders
- Liability from franchisees (ex. franchisees suing a franchisor for misrepresentation)
- Other types of liability risk
Note that each of the above mentioned franchise liabilities can be hedged through different commercial insurance products.
Franchise Insurance Premiums Are Usually
Linked to the type of franchise being insured as well as the dynamics of the general insurance market. A lot of times a franchised operation can be performing well including having a good insurance claims history, yet still subject to premium increases from insurance brokers and companies. For example, franchisor insurance premiums have gone up significantly post-covid even if the franchisor had a clean insurance loss history. It is important to utilize advanced analytics in order to maximize on premium negotiations with insurance brokers and companies.
Can a Franchisee sue a Franchisor?
Yes.
Insurance For Franchise Business
Typically a franchisor will outline insurance requirements within its franchise agreement (FA) and/or corresponding material. It is important that a franchisee follow the franchisor insurance requirements in details to minimize compliance risk. In addition, if the franchised business leases premises then it can be subject to landlord insurance requirements, which also have to be analyzed carefully and mapped against the corresponding franchisor insurance policy.
Franchise Insurance Requirements
Such requirements will vary depending on the type and scope of the franchise amongst other things. The requirements should be tailored to the nature of the franchise operation including the average size of franchisees. Franchise insurance requirements should be updated once a year at least to account for changes in the insurance marketplace as well as any changes to the franchise operation itself.