Buying a franchise in Canada: checking insurance requirements

Buying a franchise gives you access to a brand and a network, but it does not automatically transfer your risks to the franchisor. You may still bear the cost of an insured event, a customer claim or a business interruption. Before signing, make sure the contract’s insurance requirements translate into cover that is available, properly costed and suitable for your premises and operations.

1. Identify the requirements across all documents

Do not settle for a single “insurance” line in your start-up budget. Ask for the full insurance clause in the franchise agreement, the relevant schedules and any requirements imposed by the landlord or lender. If the agreement refers to a manual or standards that may change, ask for the current requirements and have the franchisor’s power to amend them reviewed.

Draw up a list specifying, for each type of cover:

• the risk to be covered and the minimum level of cover required;
• the excess, often called a deductible in Canada: the amount you must pay towards a claim;
• the individuals or businesses to be named in the policy;
• the date on which cover must begin;
• the evidence of cover to be supplied and how often;
• the contractual consequences of a lapse in cover.

Depending on the business, requirements may include public liability, property, business interruption, motor, professional indemnity or cyber insurance. This is neither a universal checklist nor a list of legal obligations: your activities, the applicable rules and your contractual commitments determine what you need.

2. Have the cover checked, not just the certificate

Send the clauses to a broker who is licensed to operate in the Canadian province concerned and is independent of the franchisor. Ask them to compare each requirement with the proposed insurance, including exclusions and endorsements. A certificate of insurance summarises cover; it is no substitute for reading the policy.

In particular, clarify the franchisor’s status if it asks to be named as an additional insured. This designation does not necessarily mean that all its activities are covered or that your own interests are protected in every situation. Ask for an explanation of its precise scope.

Then ask practical questions: water damage forces the premises to close; a product causes harm; an IT system becomes unavailable. In each scenario, who reports the claim, which cover might respond and which costs would you have to bear?

For business interruption insurance, check the events that trigger cover, the waiting period, the indemnity period and how compensation is calculated. A fall in sales or a closure does not automatically entitle you to a payout. Also ask how royalties and other contractual charges that continue during the interruption would be treated.

3. Cost any gaps before committing

Obtain a written quotation based on your proposed premises, activities and equipment. An indicative price for another outlet is not enough: the location, the building’s protective measures and the nature of the operations can affect the terms offered.

Separate three elements in your budget: the premium, the excesses and uninsured risks. A lower premium may leave you with a larger amount to absorb after a loss.

If a requirement appears difficult to insure, do not assume it will be overlooked. Ask the broker for a written explanation, then have your lawyer and the franchisor review a solution before you sign. Any agreed exception should be documented in a legally appropriate form.

If the franchise network offers a group insurance scheme, check who takes out the policy, who receives any payout and what happens to your cover when your participation ends. Compare the cover and terms, not just the advertised premium.

4. Consider insurance alongside provincial franchise law

Insurance does not replace the protections provided by franchise law. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to applicable exceptions, a disclosure document to be provided at least 14 days before a prospective franchisee signs a franchise-related agreement or makes a payment. It must include, among other things, the proposed agreements and prescribed cost information. Have someone check how the insurance obligations are presented in your disclosure documents.

Quebec has no specific legislation imposing a general franchise disclosure regime comparable to Ontario’s. The general provisions of the Civil Code of Québec apply, particularly those relating to contracts and good faith. Do not assume that Ontario’s waiting period protects a franchise purchase in Quebec.

Key takeaway: before signing, gather the insurance clauses, a costed quotation and a written comparison identifying any gaps. Your broker checks the cover; your lawyer checks what you are committing to maintain.