Franchise insurance: what to assess before you buy

Before buying a franchise in Brazil, find out which insurance policies the network requires and what they actually cover. A policy may meet the contractual requirements while still leaving you responsible for significant costs. Across a franchise network, shared standards help organise operations, but they are no substitute for assessing the risks of each outlet. Due diligence starts before you sign, with a review of the requirements and an insurance quote tailored to the business.

What Brazil’s Franchise Law requires franchisors to disclose

Law No. 13,966/2019, Brazil’s current Franchise Law, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to provide clear information about recurring fees and other amounts payable by the franchisee to the franchisor or designated third parties. Article 2, item IX, expressly includes minimum insurance requirements among the items that must be disclosed.

This does not mean the law prescribes a single standard policy for all Brazilian franchises. You need to identify what the particular network requires and check for any obligations specific to the business activity. The previous law, No. 8,955/1994, has been repealed and should not be relied on as current legislation when reviewing these requirements.

The COF must be supplied at least ten days before you sign a franchise agreement or preliminary agreement, or pay any fee to the franchisor or a person or company connected with it. Use this minimum interval to clarify the insurance requirements too, rather than treating it as the maximum time available for your review.

Compare the COF, the draft agreement and the annexes. Check which types of cover are compulsory, who takes out the insurance, who pays and when cover must begin. If there is only a general reference to ‘insurance in accordance with the network’s standards’, ask for details before committing.

Turn the requirement into a quote you can check

Ask the franchisor for a specification that you can send to a licensed insurance broker. The quote should reflect the planned business activity, premises, equipment and stock, as well as the contractual requirements. A price quoted for another outlet is only a guide, not a definitive quote for yours.

Draw up a list of questions:

• What types of cover and indemnity limits are required?
• Must you use a designated provider, or are you free to choose?
• Will you take out an individual policy, or will your outlet be included in a network-wide policy?
• Who is named as the insured, and who receives any claim payment?
• Are there security, inspection or documentation requirements before the insurer will accept the risk?
• How must you provide evidence that insurance has been taken out and renewed?

If the network offers a group insurance arrangement, ask for documents showing how your outlet will be included. Check whether limits apply separately to each outlet or are shared, where relevant, and what would happen if the policy were amended or cancelled.

Also clarify what protection applies during the set-up phase. Do not assume that insurance for the operating business automatically covers building work, installation or equipment delivered before opening.

Compare cover, not just price

The premium is the price of the insurance. The excess, known in Brazilian Portuguese as the franquia securitária, is not the fee for joining the franchise network: it is the insured party’s contribution towards certain losses, under the policy terms. The indemnity limit sets the maximum amount the insurer may pay under those terms.

Two quotes with similar premiums can offer very different levels of protection. Compare insured risks, exclusions, excesses, limits and the policyholder’s obligations. Also check the declared values of the assets and the criteria that will be used to calculate any claim payment.

Discuss specific scenarios with the broker: electrical damage that puts equipment out of action, a leak that damages stock, or an accident involving a customer. Ask which cover would apply in each case and what documentation would be needed.

Business interruption deserves particular attention. Cover for physical damage does not automatically replace lost revenue or pay expenses while the business is closed. If cover for loss of profit or fixed expenses is included, examine the events that trigger it, the limits and the indemnity period. Do not confuse it with a guarantee that the business will be profitable.

Calculate the risk that remains with you

Factor into your planning the premium, any costs of meeting the insurer’s requirements and any expenses the outlet may still have to bear. Insurance does not eliminate exclusions, compulsory contributions towards losses or losses above the policy limits.

Before deciding, draw up a comparison of the network’s requirements, the quote received and the risks left uninsured. Raise any discrepancies with the broker and, where contractual obligations are involved, with a lawyer. Also confirm who will monitor renewal dates and significant operational changes to keep the cover up to date.

Practical takeaway: only consider the insurance settled once you know what it costs, what it covers and how much you might have to pay out of your own funds if a loss occurs. Meeting the network’s requirements is the starting point, not proof that you have sufficient protection.