Buying a franchise: how to check insurance requirements

Joining a franchise network may require you to take out several insurance policies. A brief clause stating that the franchisee must have “appropriate insurance” is not enough to assess either the cost or the protection provided. Before signing, establish which policies are required, whether they are available in Croatia and whether they cover the risks for which you are responsible under the franchise agreement.

Distinguish legal obligations from the franchisor’s requirements

Croatia has no specific franchise law and no general legal obligation to take out insurance simply because you are buying a franchise. A franchise agreement is an innominate contract — one not specifically defined by law — governed by the general provisions of Croatia’s Civil Obligations Act. Specific regulations may require insurance for certain activities or risks, regardless of whether the business belongs to a franchise network.

Ask the franchisor to classify each requirement as a legal obligation, a contractual obligation or a recommendation. If they claim that a policy is legally compulsory, ask them to identify the relevant legislation and check whether it applies to your business in Croatia.

Nor does Croatia have a specific mandatory pre-contractual franchise disclosure regime, with a prescribed format and deadline, that would automatically give you an overview of these costs. This does not remove the general duties to act in good faith and deal fairly. The European Code of Ethics for Franchising can provide self-regulatory guidance, but it is not Croatian law or a substitute for reviewing the agreement.

For an overseas brand, check in particular whether policy names and required terms have been carried over from another country. A literal translation does not mean that a Croatian insurer offers equivalent cover.

Turn the contractual clause into a checklist of cover

Do not request an insurance quote based solely on the brand name. Give the insurer or authorised insurance intermediary details of your actual business activities, premises, equipment, products, employee numbers and how you deliver your services. Insurance requirements often appear in schedules or the operations manual, not just in the main agreement.

Create a table covering the following for each required policy:

• what is to be insured and which risks must be covered;
• the sum insured or limit of cover;
• the excess or other share of a claim payable by the franchisee;
• the geographical scope and period of cover;
• the parties that must be insured and those entitled to receive claim payments;
• the deadlines for taking out and renewing the policy, and providing evidence to the franchisor.

For example, property insurance should not be confused with third-party liability insurance. Business interruption cover does not mean that every fall in revenue will be compensated: the insured causes of interruption and the other policy terms are crucial.

If the franchise involves deliveries, work at customers’ premises or online sales, ask whether these activities are covered. A policy’s name is not proof of the breadth of its cover. Request a written explanation of any unclear terms and the relevant exclusions.

Compare the policy with your liability under the franchise agreement

The most important check is not whether you have a policy, but whether it matches the obligations you are taking on. The franchise agreement may require you to compensate the franchisor for certain losses or costs, while the policy may exclude some liabilities you have assumed by contract.

Give your solicitor and insurance specialist the same draft agreement. Ask them to compare the liability, indemnity and insurance provisions. Highlight any clauses under which you accept responsibility for other people’s actions or obligations that go beyond those you would otherwise have under the law.

Consider a simple scenario: a customer is injured at your premises and makes a claim against both you and the franchisor. You need to know who must report the incident, whose policy may respond and on what terms defence costs are covered. These points are not automatically resolved simply because both parties have insurance.

If the franchisor requires you to name them as an additional insured, check whether the insurer can agree to this and what effect it would have. Merely including the franchisor’s name on an insurance certificate may not give them the rights they require.

Establish the full cost and the rules for ongoing operations

Include more than the annual premium in your financial plan. Allow for any excess or other contribution towards claims, uninsured risks and the cost of protective measures required by the insurer. Compare quotes offering equivalent cover, not just their prices.

Before signing, clarify whether the franchisor can unilaterally increase the required limits or introduce new policies. Propose that any change must come with a clear explanation, advance notice and a reasonable period to comply. If the required cover is unavailable on the Croatian market, the agreement should set out a procedure for approving a suitable alternative.

Check the consequences of late renewal too. A lapse in cover should be distinguished from a delay in supplying a certificate for a policy that has already been renewed. Agree who should receive the documents, when claims must be reported and who will handle communication with the insurer. Do not accept an obligation for the insurer to notify the franchisor of every change unless the insurer has confirmed that it will provide this service.

Practical takeaway: before signing, obtain a quote that matches the actual contractual requirements. Work with your solicitor and insurance specialist to identify uninsured obligations, calculate your own financial exposure and agree workable procedures for providing evidence of cover.