Buying a franchise: check who is responsible for insurance

Franchising brings together independent business owners, but a shared brand does not mean shared insurance cover. Before buying a franchise, establish which risks your own business will bear and what the insurance required by the network actually covers. A contract clause stating that “the franchisee must arrange adequate insurance” does not tell you what policies you need or how much of a loss you can afford to pay yourself.

1. Separate the network’s insurance from your own business cover

Ask the franchisor for a written breakdown of insurance responsibilities. The network’s policy may cover only the franchisor’s own operations, even if the policy name refers to the entire network. Similarly, a collectively negotiated insurance package does not, in itself, establish that your business is insured or that all its activities are covered.

Before requesting quotes, clarify at least the following:

• Who takes out the policy and who pays the premium?
• Is your own company the policyholder, or an insured party under a policy taken out by someone else?
• Which premises, services, products and assets does the policy cover?
• Who reports a claim and deals with the insurer?
• Who pays the excess and any portion of the loss that is not covered?

If you are told that your business is covered by the network’s insurance, ask to see the policy schedule and relevant terms. An insurance certificate alone may not reveal the exclusions. If the detailed documents cannot be shared with you, ask the insurer for written confirmation of your company’s status and the scope of cover.

When buying an existing franchise business, also check that insurance cover will remain in place under your chosen transaction structure. Do not assume that the seller’s policies will transfer to the buyer or remain unchanged following a change of ownership.

2. Read insurance obligations alongside contractual liability

Finland has no specific franchising act, no legally prescribed franchise disclosure document and no dedicated system for registering franchise agreements. The relationship is governed by legislation including the Contracts Act and the Unfair Business Practices Act, as well as the Competition Act and the Trademarks Act where applicable. Insurance contracts are subject to the Insurance Contracts Act within its scope of application. Pre-contractual information must be sufficient, accurate and not misleading.

The Finnish Franchising Association’s code of ethics is binding on its members, but it is not law and does not replace your business’s insurance terms. You therefore need to establish separately what the cover provides in practice.

Distinguish between three things in the agreement: the obligation to take out insurance, liability for a loss and the insurer’s obligation to pay a claim. These are not the same. For example, a franchise agreement may require you to hold a particular policy, but taking out that policy does not automatically limit your liability to the amount insured.

In particular, have an insurance specialist review any liability you assume under the contract. Liability insurance may not cover an obligation you have accepted contractually but would not otherwise have. Ask a lawyer and an insurance specialist to review the same draft agreement so that uninsured liabilities do not fall between the two reviews.

Negotiate clear provisions on the types of insurance required, the scope of cover and how you must demonstrate that cover is in force. Also establish what happens if the required cover is not available on reasonable terms in the insurance market.

3. Test the cover against real claims scenarios

Policy names alone do not tell you whether the insurance will help your business when a loss occurs. Describe your actual operations to the insurer: what you sell, where you work, what you hold on behalf of customers and how you use the network’s systems. Include deliveries, installations and other tasks that support your main service.

Work through scenarios such as these and ask for written answers:

• Water damage at the premises: whose policy covers equipment, stock and fit-out work paid for by the franchisee?
• Injury or damage caused to a customer: does the liability policy cover the specific product or service and the full scope of your activities?
• Business interruption: what type of event triggers a claim, how long can payments continue and which costs are included in the calculation?
• Failure of the network’s IT system: is there cover if your premises are undamaged but sales or appointment bookings grind to a halt?

It is particularly important to check the conditions for a business interruption claim. Standard business interruption cover may not cover an IT outage alone, a disruption to a supplier’s deliveries or a fall in demand. Dependence on the network’s central warehouse may also need separate investigation.

Check whether franchise fees remain payable while operations are suspended. Your payment obligations under the agreement may differ from the basis on which the insurer pays claims. Do not rely on insurance to meet an expense unless cover for it has been confirmed.

4. Cost your own exposure before deciding to buy

Obtain insurance quotes based on your actual operating details before making a commitment. Compare not only premiums but also excesses, sums insured, exclusions and loss-prevention requirements. A cheaper quote is not better value if it excludes a key risk facing your business.

Draw up a brief insurance responsibility matrix listing each risk, the responsible party, the policy, the excess and any uninsured exposure. Include statutory insurance obligations, such as self-employed persons’ pension insurance and compulsory employer insurance where the relevant conditions are met. The network’s contractual requirements do not replace these obligations.

Arrange for cover to start when your activities actually begin. Property may already be at risk during refurbishment, storage or equipment deliveries, before your first day of trading. Also appoint someone to notify the insurer of changes to the business and review cover regularly.

Practical checklist: do not accept a simple assurance that the network’s insurance covers you. Obtain a written allocation of responsibilities, have the insurability of your contractual liabilities checked, and set aside funds for excesses and identified uninsured risks before buying a franchise.