A grey court woman signing a franchise insurance agreement in the UK

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.

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What is a Franchise Insurance Plan?

Franchise means carrying out specific commercial activities permitted, licensed, and carried out with a common profit earning motive. 

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 a financial insurance and what should be 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 value and brand value, the higher the insurance value. 

How Does Franchise Insurance Work?

Like any business, insurance is essential for franchise businesses to cover their operations.  

The franchisor is covered as 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 cover. 

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 cover 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:

  1. Size of business.
  2. Structure of ownership.
  3. Affiliation.
  4. Line of services.
  5. Use of reinsurance.
  6. Control of operations.
  7. Competitiveness and reputation of the franchise.  
  8. 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:

  1. Portfolio analysis of franchise value and insurance profitability.
  2. Quality, rating, profitability, and ranking of the insurer.
  3. Geographical location.
  4. Insurance premium 
  5. 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 recommeneded 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 franchisor 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 cover 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 the 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 other.

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 cover.

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 are the Effect of COVID-19 on Insurance Policies?

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

New innovative ways are emerging, and digital tools are being used extensively. More and more digitalization of business is taking place, digital contracts are replacing traditional contracts, and online payment methods are employed.

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.

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 the commercial interests very well. Early consultations, making relevant contracts, and fixing the liabilities make businesses smooth, viable, and hassle-free. Businesses must create suitable choices and refer to relevant institutions to secure their interests.

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