Franchise insurance: define your cover before expanding

Before turning a business into a franchise, ask who would foot the bill for a fire, an injury or loss suffered by a customer, or a temporary closure at an outlet. The answer cannot be left to improvisation after opening. Across a franchise network, a clearly defined insurance policy helps protect business continuity and clarify the responsibilities of franchisor and franchisee.

1. Map the risks of the business model you plan to replicate

The starting point is not to copy your existing outlet’s insurance policy. It is to identify which risks are inherent in the business and which depend on each outlet’s premises, location or activities.

Carry out this assessment with people who know the operation and a licensed insurance broker. Consider, for example:

• Property: premises, equipment, stock and improvements that could be damaged.
• Liability to third parties: situations in which the business could cause injury, damage or loss to customers, visitors or other businesses.
• Business interruption: expenses that continue when an outlet has to close temporarily.
• Specific activities: deliveries, refrigerated storage, off-site customer service or work carried out at customers’ premises.

For each risk, record the potential event, existing preventive measures and likely financial impact. Distinguish between risks that need to be managed through operating procedures and those that can be transferred to an insurer.

Insurance is no substitute for maintenance, training or compliance with legal requirements. Nor will every event be covered: terms, exclusions and limits must be examined before making any promise of protection.

2. Turn the assessment into workable requirements

Once the assessment is complete, set a minimum standard for future outlets. This should specify the cover required and the criteria for setting sums insured, indemnity limits and policy excesses — the portion of a loss that the policyholder may have to bear.

Avoid imposing a single amount without considering differences between operations. An outlet holding substantial stock may need different property cover from a predominantly service-based business. Equipment replacement costs may also vary.

Request indicative quotes based on documented assumptions. Compare not just the price, but also:

• insured events and relevant exclusions;
• limits for each type of cover and any sub-limits;
• the policyholder’s financial contribution to a claim;
• the terms of business interruption cover;
• security, safety and maintenance requirements stipulated in the policy.

Check whether the cost fits the outlet’s financial plan and whether the franchisee could absorb any uninsured losses. Apparently cheap cover may leave an exposure that available cash cannot support.

Also decide who will arrange each type of cover. Do not assume that insurance held by the building’s management, the landlord or the franchisor automatically protects the franchisee’s assets and liabilities.

3. Align insurance, the disclosure document and the agreement with Brazilian law

Law No. 13,966/2019, which governs business franchising in Brazil and repealed Law No. 8,955/1994, requires transparency about operating costs. Article 2, item IX, includes minimum insurance requirements among the information that must appear in the franchise disclosure document, known in Brazil as the Circular de Oferta de Franquia, or COF.

This does not mean that Brazil’s Franchise Law prescribes a standard insurance policy or a universal level of cover. Requirements must be designed and disclosed to suit the business model, taking account of any obligations specific to the activity.

If insurance is compulsory under the network’s rules, explain what is required, who will pay and which assumptions underpin the cost estimate. Do not present a quote as a guaranteed price: the premium may depend on the insurer’s assessment and the outlet’s characteristics.

The franchise agreement must be consistent with the COF and establish responsibility for arranging, renewing and providing evidence of cover. The COF must be delivered at least ten days before the franchise agreement or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it.

Have these provisions legally reviewed before you begin offering franchises.

4. Prepare procedures for checking cover and handling claims

Create a straightforward procedure for collecting policies, checking policy periods and tracking renewals. Specify who will check that the cover purchased meets the requirements disclosed to the franchisee.

Also document what to do when an incident occurs: prioritise people’s safety, notify the insurer in accordance with the policy, preserve evidence and inform the franchisor if operations are affected. Support from the network must not be presented as a guarantee that a claim will be paid.

Review the requirements whenever significant changes occur, such as new services, new equipment or increased stock levels. Expanding operations may require updated cover.

In practice: before offering your first franchise, bring together your risk assessment, indicative insurance quotes and rules for arranging cover. Only make this protection a franchisee obligation once its cost, scope and ongoing monitoring are clear.