Everything You Need to Know About Franchise Insurance

Introduction

Financial security is an essential part of running a business. A secure, robust business structure is vital for market value and brand identification.

Insurance is the protection from unexpected financial loss and risk to the business. Unforeseen risks and losses are a vital part of any long-standing business. Every business owner needs to provide their business with a way to recover from possible loss or damage. 

Franchise Insurance is one of the measures to ensure financial security. 

Every insurance policy has a fixed target. A person or an entity, while buying an insurance policy, has to make sure that it is relevant and valuable to their business and able to secure the interests of the business in case of loss.

What is a Franchise Insurance Plan?

Franchise means carrying out specific commercial activities permitted, licensed, and carried out with a common profit-earning motive. A Franchise Insurance Plan, on the other hand, is a specific type of insurance policy designed to meet the unique needs of franchise businesses. This type of insurance is typically tailored to the franchisor’s requirements and may be mandatory for franchisees to obtain as a condition of their franchise agreement. 

The insurance includes several types of insurance coverage, such as general liability, property insurance, workers’ compensation, business interruption insurance, etc.

Every franchisor and franchisee enters into an agreement that lays down policies for investment and decision-making regarding the franchise. It is purely a commercial interest that is the driving force for this franchisee-franchisor relationship.

A franchise insurance plan is one of the many clauses mentioned in the franchise agreement. It talks about how to choose and create financial insurance and the limitations of franchise insurance regarding the insurance and the insured. 

The insurance plan for franchises is developed based on profitability, innovative measures, and brand value. The higher the franchise and brand value, the higher the insurance value. 

Why does a franchise need insurance?

Acquiring franchise insurance protects franchise businesses from many of the consequences of their operation. Both parties to the franchise agreement need franchise insurance at the individual level and cooperatively. Insurance is also a legal requirement, where franchisees may be legally required to carry certain types of insurance, such as workers’ compensation insurance, to comply with certain state and federal regulations.

Franchisee: Insurance ensures that the franchisee’s business continues to operate with little to no disruptions in emergencies. Franchisees also need additional insurance other than the ones provided by the franchisor for their benefit and the benefit of the employees.

Franchisor: Insurance for franchisors will ensure that in case of any business disruptions between them and individual franchisees does not financially devastate the franchisor. Franchise insurance will also ensure the franchisor’s business success runs without disruption. 

How Does Franchise Insurance Work?

Like any business, insurance is essential for franchise businesses to cover their operations. The franchisor is additionally insured by the franchisee’s insurance coverage policy in all the franchise insurance requirements. It implies that the franchisor is covered the same way as the franchisee owner even though the franchisor is not directly paying for the insurance coverage. 

Franchisors hold a copy of the insurance given to them by the franchisee as proof that the insurance coverage applies to them.

Franchise insurance requirements differ in business objectives. It needs proper analysis for businesses to select insurance coverage for their operations.

What are the Criteria to Determine the Kind of Insurance Your Franchise Needs?

The insurance policy of a franchise depends upon various factors like:

• Size of business.
• Structure of ownership.
• Affiliation.
• Line of services.
• Use of reinsurance.
• Control of operations.
• Competitiveness and reputation of the franchise.  
• Business transactions and their nature.

What are the Factors Involved in the Process of Franchise Insurance?

Factors involved in the process of franchise insurance are:

• Portfolio analysis of franchise value and insurance profitability.
• Quality, rating, profitability, and ranking of the insurer.
• Geographical location.
• Insurance premium 
• Risks covered 

What are the Types of Franchise Insurance Policies?

At the time of franchise setup, you must ensure all the franchise insurance requirements are in place. It will ensure that your business is safe from any incidents of financial loss.

There are no particularly determined aspects of franchise insurance requirements. These vary from business arrangements to business arrangements. 

Ideally, your franchise agreement will mention all the specific types of franchise insurance requirements.

Apart from other carved-out insurance policies required as per the agreement, these are the standard type of franchise insurance requirements that every franchise should have:

• General Liability Insurance covers all those liabilities that occur on-site and off-site against bodily harm or property harm. 
• Property insurance covers damages done to property by fire, flood, etc.
• Employees’ insurance for the welfare of employees against wrongful termination, harassment, discrimination at work, etc
• Workers’ safety insurance covers workers’ safety at work.
• Commercial Auto Liability Insurance covers delivery vehicles and transportation items.
• Equipment Breakdown insurance covers machinery and industrial equipment used by the franchise.
• Food Contamination Insurance covers losses to production or inventory.

It’s always recommended to have insurance firms look at the insurance agreements to ensure they are reasonable under the circumstances. Firms dealing with insurance know what kind of insurance your franchise needs according to the market and solid financial cover.

What is the Most Common Mistake New Franchises Make Regarding Getting Insurance?

There is no set template or number of agreements franchises must have. Sometimes there is confusion regarding the kind of insurance your franchise needs. So, here are the mistakes that franchisors should watch out for:

Not making the cyber insurance policy

In this digital age, every business is going online. There are possibilities of data breaches and data stealing. The digital vulnerability of intellectual property and trade secrets incurs substantial financial losses to businesses.

Franchises should know the kind of insurance your franchisees need to be safe and secure from financial losses.

Not explaining the rights of a third party

Franchise insurance requirements provide a copy of insurance coverage to the franchise. In most cases, there are no determined rights and specified limitations to the liabilities mentioned in that copy. It can make the franchise responsible for the acts of the franchisor unlimited and in all possible dimensions. 

It is, therefore, vital that a prior agreement and limitation on liabilities be agreed upon between the parties to put a scale on the liabilities of parties towards one another.

Not clearly defining the status of joint or independent ownership

The acts of the franchisor are not the acts of the franchisee and vice versa. If this weren’t clear in the contract, the liabilities and duties would run uninterrupted and become the cause of concern between the parties. 

A franchise agreement should mention if the responsibilities are joint or independent of the agreement to understand the limitations of insurance coverage.

Not fixing minimum coverage requirements

Some franchise agreements require parties to invest a fixed amount of capital to be eligible for a specific cover. Franchise agreements should include this as a standard to avoid confusion and errors in the future.

What is the Effect of COVID-19 on Franchise Insurance Policies?

Like any other sector, the recent pandemic disrupted the franchise system. Delivery of goods and services, manufacturing, and production were all got affected. It led to market shifts and changes. 

Franchisors need to examine their existing business interruption insurance policies to determine if they can make claims for losses due to virus-related interruptions. Even if there are provisions that exclude coverage for COVID-19 related losses, such as a virus exclusion, it is important to seek advice from lawyers to determine whether reporting the claim is necessary to comply with any reporting obligations in case a government authority mandates coverage under the policy, despite the virus exclusion.

Insurance systems are used as a mandate now; businesses are taking more steps to avoid significant losses by enabling larger insurance covers. Insurance firms are making policies that cover every aspect of business and transactions.

Frequently Asked Questions

What is franchise insurance?

Franchise insurance is a type of insurance coverage designed specifically for franchise businesses. It helps protect the franchisee and franchisor from various risks and liabilities associated with operating a franchise business.

What types of insurance policies are typically included in franchise insurance?  

Franchise insurance may include various types of coverage, such as general liability, property insurance, workers’ compensation, cyber liability, employment practices liability, equipment Breakdown insurance covers, and business interruption insurance.

Can franchisees customize their franchise insurance coverage?

Yes, franchisees may be able to customize their insurance coverage to meet their specific needs, but they must ensure that their coverage meets the minimum requirements set by the franchisor.

Conclusion

Franchise insurance is an essential part of the life cycle of the franchise business. It covers the risks and aspects of the financial security of franchise insurance requirements. 

Knowing the kind of insurance your franchise needs is vital in securing commercial interests. Early consultations, making relevant contracts, and fixing liabilities make businesses smooth, viable, and hassle-free. Businesses must create suitable choices and refer to relevant institutions to secure their interests.