Franchise Insurance: Understanding the Risks and Relationships

A franchisee, which is a business that licenses the logo and services of a brand, needs business insurance based on the industry and franchisor. Different coverage arrangements exist for franchise operations, such as a franchise insurance program. Before getting the appropriate business insurance plan for a franchisor or franchisee, here are some essentials.

Essential Insurance Coverage

The most essential insurance coverage for any business begins with general liability, which pays the legal costs of multiple types of lawsuits. If, as a franchisee, you are allowed to operate on your own property, you will also need commercial property insurance, which protects the value of your structures and the contents within them.

You will most likely need to customize your coverage since every franchise is different. The main factors in determining the type of coverage you need involve your relationship with the brand and the risks that exist within the industry. The more risks you face, the more coverage you need, either through add-on coverage or by raising coverage limits. In addition to worker’s compensation if your business has employees and commercial auto if it owns vehicles, consider these other types of coverage as well:

  • Directors and Officers (D&O) – Protects against mistakes made by company managers and shields them from financial harm.
  • Employment Practices Liability Insurance (EPLI) – Protects current and former personnel from claims that involve improper governance in relation to employees.
  • Product Liability – Protects your business from legal liability resulting from customer lawsuits filed due to a malfunctioning or hazardous product.
  • Excess Liability – Provides or extends coverage beyond a basic insurance policy.
  • Equipment Breakdown – Covers losses created when the equipment doesn’t work properly or breaks down.
  • Loss of Business Income – Also called business interruption insurance, this coverage provides benefits when your business cannot operate.
  • Cyber Liability – This coverage pays for a cyber breach and damage caused by hackers.

Franchisor Considerations

A franchisor has the power to design agreements that suit their business needs with franchisees. The franchise agreement should state whether or not the franchisee is required to provide their own insurance or be part of a franchise insurance program. In many cases, the brand owner requires affiliates to “indemnify, defend and hold harmless the franchisor against claims” resulting from the actions of a franchisee.

Franchisee Considerations

Before signing a franchise agreement, a franchisee should be clear on which party is responsible for insurance. Some brand owners might require special coverage for certain aspects of the business, such as providing drive-thru service. A franchisor that owns all of its properties may already have all the proper commercial property and general business liability insurance in place.

As a franchisee applicant, you should already be familiar with the risks associated with your industry. It is also best to move on if the franchisor does not give you clear answers to your questions about insurance since it’s not something that can be ignored or put off for later.

How Can the RMS Insurance Franchise Insurance Program Help You?

Getting the right insurance coverage to operate a franchise comes down to many details. It helps to work with insurance experts who have experience working with providing insurance to both franchisors and franchisees to give you a better sense of your viable coverage options.

Contact our team at RMS Insurance to learn more about choosing a franchise insurance program. You can count on us to find the right customized coverage for your operation.