Insurance for franchise networks: agree cover before you grow

When you turn an established business into a franchise network, you need to rethink its insurance cover. Insurance for your own outlet does not automatically cover an independent franchisee’s property, liabilities or business interruption. Before signing your first franchise agreement, define who insures what, how proof of cover will be provided and who takes action when an incident occurs. The aim is not to produce the longest possible list of policies, but to put together cover that reflects the business’s actual risks.

1. Establish whose loss is involved

A franchise network operates under a shared brand, but its businesses are independent. Finland’s Suomi.fi public information service emphasises that franchisees are responsible for their own obligations and bear the risks of running their businesses. As the founder of a network, you therefore need to distinguish your existing business’s insurance cover from the needs of future franchisee businesses.

Start with potential incidents, not the names of insurance products. Review scenarios in your current business, such as a customer injury, water damage to premises, equipment breakdown, a service error or an IT outage. For each one, record whose property would be affected, who might be liable for compensation and whose sales would be interrupted.

Carry out this assessment with an insurance specialist. A single incident can cause losses to several businesses, even if it occurs at just one outlet. For example, a franchisee’s property insurance does not necessarily cover equipment owned by the franchisor.

A useful worksheet includes:

• the incident scenario and its impact on operations
• the owner of the property and any party potentially liable for compensation
• the business taking out the policy and the parties to be insured
• the excess, key exclusions and limitations, and the amount of cover
• the necessary preventive measures and response procedures.

Do not assume that liability accepted under a contract is automatically covered by liability insurance. Policy terms may restrict cover for liability a business has assumed solely by contract. In particular, have any commitments that extend beyond normal statutory liability checked.

2. Separate statutory cover from network requirements

Finland has no dedicated franchising act, franchise agreement registration system or legally prescribed franchise disclosure document. This does not remove obligations under general legislation. Relevant laws include the Contracts Act, the Unfair Business Practices Act, the Competition Act and the Trademarks Act. The Insurance Contracts Act governs insurance contracts within its scope.

The Finnish Franchising Association’s code of ethics is a form of self-regulation, not legislation or official approval of insurance cover. The network must ensure that its insurance requirements suit the business and its contractual arrangements.

Divide your insurance framework into three categories. The first covers statutory insurance obligations that apply to each business according to its circumstances. For example, self-employed persons’ pension insurance, employees’ pension insurance and occupational accident insurance each have their own statutory conditions. The type of business activity may also create specific insurance obligations.

The second category covers insurance required by the franchise agreement. Depending on the business, this might include business liability, property and business interruption insurance. The third category covers additional protection recommended to franchisees. Make it clear what is compulsory and what is a recommendation.

Avoid imposing a single, fixed requirement on everyone. A small service outlet and a site using extensive equipment may not need the same cover. Base requirements on the potential consequences of a loss, and check that the required insurance is available in practice.

3. Make insurance requirements clear enough to meet

A contractual clause stating simply that “the franchisee must have adequate insurance” leaves important questions unanswered. Define the activities to be insured, the types of cover required, any minimum limits of cover and the criteria for an acceptable excess. Set these levels on the basis of expert advice rather than copying them from another network’s agreement.

Also specify when cover must begin. Risks may arise during refurbishment, deliveries or equipment installation, before sales to customers begin. The start of cover should therefore not automatically be tied to opening day.

Give prospective franchisees the requirements early enough for them to obtain quotations and include the costs in their business plans. If the network negotiates a shared insurance arrangement, set out in writing at least who the policyholder is, which businesses are insured, how billing works, who pays the excesses and what happens when a franchisee leaves the network. A joint quotation does not, in itself, mean shared insurance cover.

Also agree how franchisees will provide evidence that their policies are in force and report material changes. An insurance certificate is a useful starting point, but it may not show every exclusion or limitation. Where necessary, ask the insurer to confirm the specific cover required by the network.

Checks carried out by the franchisor must not create an unfounded assurance that every possible loss will be covered. The insurer determines whether a claim is covered on the basis of the policy terms and the circumstances of the incident.

4. Rehearse your incident response and review cover annually

Your insurance framework needs a short incident response procedure alongside it. This should explain who prevents further damage, documents the incident, notifies the insurer and informs the franchisor. Urgent safety measures always come first.

For example, rehearse a scenario in which water damage closes an outlet. Establish whose policy should cover the fixtures and equipment, how the business interruption loss will be substantiated and which accounting records the franchisee needs to retain. Business interruption insurance does not generally cover every loss of sales: cover depends on the protection agreed and the policy terms.

Review the insurance framework regularly and whenever there is a material change in operations. A new service, delivery model, expensive piece of equipment or enlarged outlet may alter the risk. Appoint someone within the network to keep the requirements up to date and manage changes through the agreed process.

Practical summary: before signing the first franchise agreement, draw up an insurance responsibility matrix, have it reviewed by a specialist and test your incident response procedure using a hypothetical case. This helps ensure that shared ways of working across the franchise network do not obscure each business’s individual responsibility for insurance.