Rikor founder Wade Millward explains the essential insurance coverage franchisors need to safeguard their business.
KEY TAKEAWAYS:
- The right insurance coverage can help franchisors protect their brand and mitigate the financial impact of lawsuits, cyberattacks, natural disasters and other risks.
- Depending on their industry, some franchisors may require additional coverage or custom policies due to the unique risks associated with their business.
- Franchisors should always consult a licensed insurance professional in their state to ensure that their franchise system is properly insured.
Whether you’re a startup franchisor or managing a growing franchise system, having the right insurance coverage is critical for safeguarding your business.
“Franchising inherently has risk and exposure, because … franchisors specifically are creating operating manuals, policies and procedures that you're handing over to a franchisee and entrepreneur,” says Wade Millward, founder and CEO of Rikor, an insurance consultancy that specializes in connecting franchisors with custom policies that can scale with their brands.
Depending on your industry and location, those risks could include anything from lawsuits initiated by aggrieved franchisees, injured customers or jilted vendors to fires, damaged property, cyberattacks, natural disasters and more. Because of that, having the right insurance coverage to meet your brand’s specific needs is critical for its long-term growth and success.
Identifying exposure, risks and requirements
It’s not uncommon for new and emerging franchisors to wonder why insurance matters in franchising – and what coverages every franchisor should require to protect their business.
Because inadequate insurance coverage can lead to steep legal fees, bankruptcy or worse for franchisors who are sued, getting clear about the specific risks associated with your franchise system can help you make better choices about insurance and avoid gaps in coverage that could cost you your brand.
“What you need to do first is understand the operations of the specific risk or the exposure. What is the business? Is it a quick service restaurant, is it a home service business, is it a ninja gym? They're all uniquely different, right? They're all different. And so first, understand the operations, understand the unique exposures,” Millward says.
After identifying your brand’s specific exposure and risks, it’s critical to purchase insurance coverage that can protect your business against financial losses due to those risks. It’s also important to require franchisees to carry the right coverage for their franchised businesses – a process that starts with understanding the role of insurance in your Franchise Disclosure Document (FDD) and franchise agreement.
By working with a licensed insurance professional to include insurance requirements in both documents that are specific to the unique exposure and risks of your franchise system, you can begin to safeguard your brand against future lawsuits.
“You’re creating this protective, defensive moat for your franchising entity. It's extremely important, and if you just slack on the insurance requirements because you think, ‘I don't want to require too much; I don't want it to cost too much; I don’t want to mess up my Item 19 or the Item 7,’ or something like that, it's going to bite you down the line as you continue to scale,” Millward says.
Choosing the right coverage
There’s no shortage of options to choose from when it comes to insurance, and knowing which policies you and your franchisees need can feel confusing. Because of that, it’s important to consult a licensed insurance professional in your state when selecting an insurance policy or determining the insurance requirements for your business.
Although coverage needs vary between franchise systems, Millward says basic types of insurance franchisors often need include, but aren’t limited to, the following:
- General liability insurance. Financial losses from lawsuits related to bodily injury, property damage and more can often be mitigated by general liability insurance. Coverage can sometimes be limited, though, so it’s important to speak with a licensed insurance professional to understand your policy’s exclusions.
- Completed operations insurance. Certain types of businesses might benefit from completed operations insurance to protect against lawsuits related to work or projects that could cause property damage or bodily injury after they’re finished.
- Cyber liability insurance. If your business experiences a cyberattack or data breach, cyber liability insurance can help protect against certain financial losses.
Franchisors might also consider coverage that can add an extra layer of protection, including but not limited to the following:
- Errors and omissions insurance. Sometimes called E&O, this coverage can protect against lawsuits related to mistakes, negligence, professional liability and more. Ask your licensed insurance professional about a specific franchisor professional services endorsement to ensure coverage.
- Directors and officers liability insurance. To protect their personal assets, corporate directors and officers might consider D&O coverage.
It’s important to remember that insurance coverage often has limitations and exclusions that might not always be obvious. Depending on your business and industry, it’s also possible that your franchise system might need specialty coverage that goes beyond a standard policy. Because every franchise system’s risks and exposure are different, always consult a licensed insurance professional to understand your business’s specific coverage needs before buying a policy.
Being proactive about safeguarding your business
As a franchisor, it’s important to understand how insurance impacts franchise compliance and risk – especially when creating your franchise operations manual and FDD.
While the FDD is updated annually, operations manuals typically offer franchisors more flexibility for updating their policies and procedures throughout the year. Still, Millward says franchisors often overlook the importance of updating their insurance requirements in both documents – a mistake that can lead to headaches later on.
“There's actually several components or several clauses, if you will, that I'm looking for specifically in the FDD. And one of the clauses that I'm looking for is very specific language around giving the ability to the franchisor to modify the operations manual, to manipulate or modify the insurance requirements as they deem necessary, as they see fit,” Millward says.
Because franchisors are often named in lawsuits against franchisees, it can also be a good idea to consider requiring franchisees to include you (the franchisor) as an “additional insured” on their insurance policies.
“An additional assured status allows you to file a claim directly on the franchisees’ insurance policy for the exposure that they have, for the risk that's inherent to their business,” Millward says, adding that franchisors should consult a licensed insurance professional to discuss which additional insured form is right for their business.
Staying realistic and avoiding mistakes
Although having the right insurance coverage can alleviate the financial impact of many types of lawsuits, insurance won’t necessarily protect you or your business in every situation. Because of that, it’s critical to know which mistakes to avoid that could cost you your brand as a franchisor.
To operationalize your insurance requirements while sidestepping common mistakes, consider the following best practices:
- Hire professionals. Have a licensed insurance professional review your insurance requirements regularly to evaluate your business’s exposure and ensure there are no coverage gaps in your policy or insurance requirements. Risk managers can also be helpful for identifying areas where you might not be covered.
- Respect the law. Even the best insurance policies won’t protect against fraud or intentional misrepresentation, so it’s important to adhere to federal and state laws in all of your business dealings.
- Update documents. Regularly update your FDD, franchise agreement and operations manual to reflect your current insurance requirements – and make sure each document’s contents are aligned with your other documents each time.
- Educate franchisees. Set expectations with franchisees about insurance requirements and make sure they understand the specific coverage they need without any guesswork.
- Monitor compliance. Utilize technology to automatically track franchisees’ proof of insurance and monitor policy expiration dates.
By keeping your franchise documents updated and establishing the proper insurance requirements to protect your business from its specific exposure and risks, you can avoid potentially costly legal issues in the future while safeguarding your brand.
“That's why insurance is so important, right? Because you're protecting the thing we invest our time into, our effort into – the sweat equity that goes into it, all the frustration, all of the nights that we're staying up at night, all of that stuff – for it to be taken away with one uninsured claim,” Millward says.
Disclaimer: This article is for educational purposes only. Nothing in this article is business, financial, legal or insurance advice. To make sure your business is properly insured, consult a licensed insurance professional to discuss liability protection and insurance options.
To learn more about Rikor Insurance Consultancy, visit https://www.protectmyfranchise.com.
