Buying a franchise in Colombia: how to check the insurance

A flood, fire or customer claim can threaten a franchise’s ability to keep trading. Before buying, it is not enough to know that the brand requires you to ‘have insurance’: you need to understand the cover, its limits and its cost. Within a franchise network, sharing a brand does not automatically mean sharing an insurance policy or being protected against the same risks.

1. Establish what the contract actually requires

In Colombia, franchise agreements are not a specifically regulated type of contract: there is no dedicated law governing the relationship comprehensively. They are subject to the terms validly agreed by the parties, the general provisions of the Commercial Code and, where relevant, the Civil Code. Insurance contracts, by contrast, are specifically regulated under the Commercial Code.

You therefore need to distinguish between insurance required by the laws and regulations applicable to your business activity and insurance that the brand makes a contractual obligation. There is no universally compulsory policy simply because you are buying a franchise. Specific requirements may depend on the business activity, assets, premises and other related contracts.

Ask for insurance obligations to be set out in the contract or in a clearly identified schedule. Avoid accepting a generic reference to ‘insurance determined by the franchisor’ without understanding the initial requirements and the procedure for changing them.

The document should answer the following questions:

• Which risks must be insured, and from what point?
• What minimum levels of cover are required?
• Who takes out, pays for and renews each policy?
• What evidence of insurance must the franchisee provide?
• How are changes to the requirements communicated?

2. Check who each policy protects

If the franchisor says it has insurance for the entire network, ask for evidence that your company, premises and business activity will be included. A sales presentation or generic certificate will not reveal all the terms of the cover.

Request the relevant documentation and review the general terms, policy-specific terms and endorsements with an insurance intermediary. Identify the policyholder, who takes out the insurance; the insured, whose interest or risk is protected; and the beneficiary, who receives the payment or benefit where applicable. These do not have to be the same person or entity.

Also ask whether the limit under a group policy is shared across several outlets. If so, you need to understand how claims arising at other locations could affect the cover available to you.

Review the landlord’s insurance separately from the business’s insurance. The fact that the owner insures the building does not establish that your stock, equipment or liability to third parties is covered. Nor should you assume that a policy taken out by the franchisor covers every loss suffered by the franchisee.

3. Review risks, exclusions and costs you must meet yourself

Request quotes based on the actual operation: its activity, location, equipment, stock and security measures. A quote for a different outlet may be of little use when deciding whether to buy.

Depending on the business, it is worth assessing cover for property damage, liability to third parties and loss of income due to business interruption. These are possible types of cover, not a universal list of compulsory insurance policies.

For each proposal, examine four aspects:

• Cover limit: how much the insurer may pay under the agreed terms.
• Excess: the portion of a covered loss you would have to pay yourself.
• Exclusions: which circumstances are not covered.
• Conditions of cover: what measures, declarations or actions the policy requires.

Pay particular attention to business interruption. This does not necessarily mean that every closure will result in a payout: cover may depend on insured property damage and be subject to specific time periods and limits.

Include premiums, excesses and uninsured risks in your financial assessment. Ask your adviser to explain in writing how the cover would work in a specific scenario, such as a fire that damages stock and forces the business to stop serving customers temporarily.

4. Agree what to do when an insured event occurs

Before signing, establish who will notify the insurer, who will gather supporting evidence and how decisions will be coordinated with the franchisor. The brand’s internal procedures must not prevent you from meeting the obligations and deadlines applicable to the insurance.

Also clarify who authorises repairs, how damage is documented and what happens to the franchise’s financial obligations while the outlet remains closed. An insurance payout does not, in itself, suspend contractual payments.

Ask for the franchise agreement and proposed policies to be reviewed together: a lawyer can assess the obligations, while an insurance adviser can assess the actual cover.

Practical takeaway: do not buy on the strength of the statement ‘the franchise is insured’. Before committing, obtain a simple table identifying each risk, the policy that covers it, its cost and the portion of the risk you will still bear.