Buying a franchise: how to check insurance requirements

Before buying a franchise, simply adding an “insurance” line to your budget is not enough. You need to know whose property and liability the policy covers, which events are actually insured and who will bear any uninsured loss. Within a franchise network, a shared brand can create the impression of shared protection. However, franchisees trade in their own name, for their own account and at their own risk, so you must check the cover for your particular outlet.

1. Separate legal obligations from brand requirements

The Czech Republic has no specific franchise law and no general legal requirement to take out insurance simply because you are buying a franchise. Franchise agreements are usually concluded as contracts not specifically defined by law under Section 1746(2) of Act No. 89/2012 Coll., the Czech Civil Code. The Code also governs insurance contracts and general rules on compensation for harm. Depending on your business activities, other statutory insurance requirements may apply and should be checked separately.

An obligation to insure your outlet may arise from the franchise agreement, lease or loan terms. These requirements are not necessarily the same. A landlord may require cover for damage to the leased premises, while the franchisor may emphasise liability towards customers.

Czech law does not require franchise agreements to be entered in a special register, nor does it prescribe a standard pre-contractual disclosure document. General pre-contractual disclosure duties still apply, however. Ask for a list of required insurance policies before signing, including references to appendices and the operations manual. The European Code of Ethics for Franchising is a self-regulatory code, not Czech law or a substitute for policy terms.

2. Establish who the shared policy actually covers

The statement “our network is insured” does not confirm that your company is covered too. The policyholder is the party that takes out the insurance contract; the insured is the person or entity whose insurable interest the policy covers. These may be different parties. Also check who would receive any insurance payout.

If the franchisor offers a group insurance arrangement, ask for the relevant policy documents and written confirmation that your business is included. In particular, check:

• the precise identity of the insured and the outlet’s address;
• the insured activities, including deliveries or work away from the premises;
• the extent of cover for property you own, rent or hold in your care;
• when cover starts and the procedure for adding a new outlet;
• whether any cover limit is shared among several members of the network.

A shared limit may mean that a claim elsewhere in the network reduces the cover remaining for your outlet. Ask whether such a restriction applies and how you will be notified when the limit is used. A certificate confirming that a policy exists may not answer all these questions.

3. Compare contractual liability with policy exclusions

The franchise agreement may require liability insurance while also imposing obligations that a standard policy will not cover. Common risks include contractual penalties and liability assumed beyond what the law requires. Do not assume these are insured: the specific policy wording and exclusions determine the cover.

Work through several realistic scenarios with an insurance intermediary: a customer is injured at your outlet, a water leak damages a neighbouring shop, a refrigeration breakdown spoils stock, or a fire interrupts trading. For each scenario, ask which policy might respond, under what conditions and which costs you would have to bear yourself.

Pay particular attention to business interruption insurance. Do not assume it will compensate for every loss of revenue. Payment generally depends on the insured cause of the interruption, the costs covered and other policy conditions. An obligation to keep paying rent or franchise fees does not, in itself, mean those payments are insured.

4. Calculate both the premium and your own exposure

Include more than the annual premium in your financial plan. Excesses, limits for individual risks and any restrictions on payouts also matter. A low premium may come at the price of a high excess for precisely the event that would pose the greatest threat to your outlet.

Request a quote based on your actual business details, rather than just an indicative price for the network as a whole. Describe the value of equipment, stock and alterations to the premises, the nature of the services you provide and the security measures in place. An inaccurate description of the risk could complicate a later claim.

If the franchisor collects the premium, establish whether it charges only the insurance cost or also an administration fee. The agreement should specify how the price will be substantiated, how charges will be reconciled and what happens when your participation in the shared insurance arrangement ends. Also consider whether you can arrange equivalent cover yourself, and agree the approval criteria in advance.

5. Agree procedures for claims and policy changes

Before opening, decide who will report a loss to the insurer, who will inform the franchisor and who will gather photographs, documents and incident records. Notifying head office may not count as notifying the insurer. Your procedure must comply with the policy terms, including any rules on admitting liability for a third-party claim.

For shared insurance, agree arrangements for prompt notification of changes to cover, unpaid premiums or termination of the policy. You need enough time to arrange replacement insurance without a gap in cover. Review and update your insurance regularly when your activities, equipment or scale of operations change.

Practical takeaway: Before signing, compare the franchise agreement’s requirements with the actual insurance policy. Obtain confirmation of who is covered, what is excluded and how much you would have to pay yourself if a loss occurred.