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Franchise Tutorial 13: Intro to Insurance

When opening a business as a franchisee, you will want to ensure that you are adequately insured. Proper insurance allows you to recover from a financial loss during the occurrence of a specific event. Such event might consist of an employee or customer being injured at the business premises, business interruption due to fire or flood, theft or even employee fraud. Each of these events can cause the franchisee to have a loss of income and also cause the franchisor to incur a loss of royalties.

As you make tenant improvements and stock inventory prior to opening your business, you will want to have insurance coverage commence immediately upon taking procession of the premises. Typically in a franchise agreement, or within the operation manual, there will be specific insurance requirements that you are obligated to get from insurance providers. Typical insurance requirements include:

Comprehensive public liability insurance: coverage in case a customer, employee or any other person suffers bodily injury while on your premises or as a result of your service or products
Product Liability Insurance: for physical loss or damage to inventory
Property Damage Insurance: for property damage due to fire, flood, smoke, vandalism, etc.
Business interruption insurance: for financial loss from closing of the business due to damage or destruction of property
Employment Practices Insurance: coverage arriving from such claims as discrimination, wrongful dismissal or harassment
Workers Safety Insurance: coverage for employees at the workplace
Auto Insurance: coverage for delivery vehicles, etc.

The franchise agreement will normally require the franchisee to add the franchisor as an additionally insured third party to the insurance policy and provide a copy of the insurance certificate for the franchisor’s records. These requirements are in place to protect the franchisee and the system as a whole and typically do not cost anything more to the franchisee. This also allows the franchisor to claim any lost royalty payments from the insurance company and to protect themselves against lawsuits (which may arise against them through no fault of their own) as a result of such things as personal injury. The franchisee is required to indemnify the franchisor from all fines, suits, claims or actions of any nature related to the operation of the franchisee’s business. Without adding the franchisor, you would be assuming the financial risk, which defeats the purpose of the insurance. It allows the franchisor to operate efficiently and protects them from potentially spending financial resources on issues that are at an individual franchisee location level.

The cost of insurance will vary depending upon numerous factors including, but not limited to, the geographical area, type of business, deductable amounts and the dollar amount of the coverage. Franchise systems that have reached a certain size will often negotiate a group policy with a preferred supplier in order to pass savings on to the franchisee. The franchise agreement will often state that the franchisee may be required to purchase insurance from a preferred supplier. This allows all franchisees in the system to take advantage of the franchise system’s size and buying power.

In addition to the required business insurance, franchisees will want to look at optional insurance packages to further protect themselves and/or their employees. For example:

Life Insurance
Disability Insurance
Critical Illness Insurance
Health plan insurance

Employees are increasingly expecting and seeking higher standards for medical service and financial security. Group insurance and benefit plans for employees allow employers to be competitive and attract and retain good employees. A group plan is significantly lower in cost compared to individual coverage.

This article is by no means an exhaustive list of the insurance available. Not all coverage will apply to your specific circumstance. Your specific insurance needs will vary depending upon the nature of the business and exposure to potential liabilities. Consult with your franchisor to determine the specific needs required and consult with an insurance broker. They will be able to assess your specific circumstances and provide advice as to what products are best for you and your business. Be sure to have them fully explain the specific details of the insurance policy and the coverage and the restrictions that apply. A list of insurance companies specializing in the franchise model can be found on www.cfa.ca.

Ultimately insurance is planning for worst-case scenarios. With insurance in place you can focus your energies on building a successful business and not be worried about financial loss due to hardships that are often outside your control.