Buying a franchise: how to check insurance cover for your premises

When joining a franchise network, it is easy to assume that a familiar brand also means shared protection against losses. Yet a franchisee remains an independent business, and the franchisor’s policy may not cover the franchisee’s liability or property at all. Before buying a franchise, check not only that insurance exists, but above all who it protects, which risks it covers and on what terms. The difference between an assurance that “we’re insured” and actual cover can be crucial to your business.

1. Find out who is actually insured

Start with a simple question: will you have your own insurance policy, or will you join a scheme arranged by the franchisor? Neither option is automatically better. What matters is the scope of cover and whether it suits your specific business activities.

If the franchisor offers a shared insurance scheme, ask for documents that establish how your business and premises are covered. Confirmation that the franchisor pays the premium is not enough. You also need to understand the terms, exclusions and claims procedure.

In particular, ask for written clarification of:

• who the policyholder is and who is insured;
• whether cover extends to your company or to you as a sole trader;
• which activities and business addresses are covered;
• whether the cover limit is shared with other members of the network;
• who pays the excess and who reports a loss;
• how you will be notified if cover changes or ends.

Assess a shared limit differently from a limit available exclusively to you. Ask whether claims from other premises could reduce the amount available for your own loss. The answer must be based on the specific policy, not a general presentation about the brand.

2. Compare the policy with your contractual liabilities

The Czech Republic has no specific franchising legislation. A franchise agreement is typically entered into as an agreement not specifically defined by law under Section 1746(2) of the Civil Code, Act No. 89/2012 Coll. The same legislation also governs general liability for damage and insurance contracts. Depending on the business activity, other legislation may apply, such as consumer protection or employment law.

Nor is there a specific statutory requirement to provide prospective franchisees with a standardised pre-contractual franchise disclosure document. This does not, however, rule out general pre-contractual duties to provide information. You should therefore expressly request the insurance documents before signing. Joining a franchise network does not, in itself, give you insurance cover.

The franchise agreement may require you to maintain certain insurance, provide evidence that it remains in force or accept liability for specified losses. Compare these obligations with the policy terms, with help from a lawyer and an insurance specialist. Pay particular attention to clauses requiring you to indemnify the franchisor against third-party claims.

An obligation you accept under a contract is not necessarily insurable or covered by standard liability insurance. Equally, you cannot assume that an insurer will pay a contractual penalty. Each such obligation needs to be assessed separately.

3. Check specific scenarios, not package names

An offer of “comprehensive business insurance” tells you little on its own. List several events that could have a financial impact on your business, and ask for an explanation of how each would be covered, with a reference to the relevant policy provision.

For a food outlet, these might include a customer becoming ill after consuming a product, or stock spoiling because of a refrigeration failure. For a service business, one example might be damage to an item entrusted to you by a customer. Whatever your sector, it makes sense to check cover for fire, water leaks, theft of equipment and business interruption.

For each scenario, record:

• whether the event is covered and which exclusions apply;
• the cover limit or sub-limit and the excess;
• the security and preventive measures required;
• the documents needed to substantiate the loss;
• any time limits on claim payments or the period covered.

For business interruption, check what event must trigger the disruption for cover to apply. Insurance may not cover every closure or fall in turnover. Also ask which ongoing expenses are covered and whether, under the policy terms, these may include payments to the franchisor.

Make a clear distinction between equipment you own, equipment you rent and equipment entrusted to you. Using equipment and being responsible for it does not necessarily mean it is covered by your property insurance.

4. Build protection into your budget and opening plan

Alongside premiums, include a reserve in your financial plan for excesses, uninsured losses and the wait for a claim to be paid. Insurance is no substitute for the cash needed to deal with an emergency immediately. Do not assess the cheapest quote in isolation from the risks you will still bear.

Pay attention to when cover starts, too. Risks may arise as soon as you take possession of the premises, install equipment or bring in stock, rather than only when you make your first sale. Arrange the start dates to reflect your actual preparations.

Before opening, appoint someone to take responsibility for insurance documents and reporting claims. If you are joining a shared insurance scheme, agree how you will access the necessary documents and communicate with the franchisor. Discuss subsequent changes to your activities, equipment or stock values with your insurer or insurance intermediary as they arise.

Practical takeaway: Before signing, prepare an overview of your liabilities, insurance cover and uninsured risks. If you cannot say who would pay for a major loss and from what funds, the protection for your future business is not yet settled.