Buying a Franchise: Check Product Liability and Insurance

A strong brand does not automatically protect you against claims arising from defective products. As a franchisee, you generally trade in your own name and for your own account. Before joining, you should therefore establish which product risks your business will take on and which insurance will actually cover them. In a well-organised franchise network, responsibilities, communication channels and support in the event of a claim are clearly defined.

1. Establish your role in the supply chain

Germany has no specific franchise legislation or national franchise register. Franchise agreements are governed primarily by general civil law, commercial law where applicable, and German and EU competition law. Where products cause harm, the German Civil Code (BGB) and the German Product Liability Act are particularly relevant. Membership of a franchise network does not override these statutory rules.

Start by distinguishing between two issues. If goods you sell are defective, customers may have statutory remedies against your business as the seller. If a defective product also causes personal injury or certain types of property damage, additional claims for compensation may arise. Strict liability under the German Product Liability Act applies primarily to manufacturers; fault-based liability under the BGB may also apply.

Your actual role is crucial. If you make products yourself, your business may qualify as the manufacturer. Anyone who presents themselves as the manufacturer by putting their own branding on a product, or who imports products from outside the European Economic Area into the EEA in the course of business, may also be liable under the Product Liability Act. In certain circumstances, even a supplier may be liable as if they were the manufacturer: for example, where the manufacturer cannot be identified and the supplier fails to identify either the manufacturer or their own supplier within the required timeframe.

For the product categories you intend to sell, request an overview covering:

• Who manufactures the goods, and who imports them where applicable?
• Under whose name or brand are they sold?
• What processing, mixing or manufacturing will your business carry out?
• Can manufacturers, suppliers and batches be reliably traced?

Do not rely on a blanket statement that head office assumes “all product liability”. Obtain a legal assessment of your specific supply chain.

2. Clarify contractual support and how costs are shared

The franchise agreement should set out what happens when a product defect is suspected. This should include designated contacts, reporting channels, support with investigating the cause and arrangements for preserving important records. Also ask who decides whether to suspend sales and how affected businesses are notified.

The distinction between liability to third parties and internal reimbursement arrangements is particularly important. An agreement under which the franchisor covers certain losses does not automatically remove injured customers’ statutory claims against your business. It may simply give you an internal right to reimbursement or indemnification. The value of that right also depends on whether the party responsible can meet its obligations.

In particular, have the following points checked:

• Which losses and costs does any promised indemnity cover?
• Does it also cover valid claims arising from defects in products mandated by head office?
• Who handles the defence against unfounded claims?
• What happens if your business makes errors in storage, preparation or labelling?
• Who pays for investigations, transport, disposal and customer communications?

Vague, catch-all clauses should be clarified before you sign. Even in business-to-business dealings, standard contract terms are subject to scrutiny under sections 305 onwards of the BGB, although special rules apply to commercial transactions. Whether a particular allocation of liability is legally effective must be assessed case by case.

3. Check insurance cover against your business activities

A requirement to hold insurance in the franchise agreement does not prove that the proposed cover is sufficient. Ask whether you need your own policy or will actually be covered under an existing one. Written confirmation of cover should clearly identify your business and the activities insured.

Business liability insurance may cover personal injury and property damage arising from your operations. However, the policy wording determines which product-related losses are included. Extended product liability cover may be relevant for certain consequential costs, while recall costs often require separate cover. Not every financial consequence of a defective product is insured. In particular, fulfilling your own obligations to supply goods or remedy defects is generally not covered as an ordinary liability claim.

Discuss your actual activities with a qualified insurance adviser or broker: manufacturing, processing, importing, delivery and, where relevant, online sales. Check cover limits, excesses, exclusions, territorial scope and notification requirements. With a group policy, it is also important to establish whether claims from other businesses could exhaust a shared annual aggregate limit.

4. Run through a claim scenario before joining

Test the proposed procedures using a simple scenario: a customer reports an injury caused by a product you sold. Who records the report? Who notifies the insurer and head office? How are the product, batch details, proof of supply and any potential evidence preserved?

Also establish who checks whether the authorities must be notified and who makes any required notifications. Your business’s statutory duties cannot be discharged simply by reporting the matter internally to head office. Staff should also know that they must not admit liability or promise payment without prior agreement, but must not delay necessary protective measures.

Practical takeaway: Sign only when your supply-chain role, internal allocation of costs and insurance cover align. A written breakdown of responsibilities and verified evidence of insurance are more reliable than a general assurance of protection from the brand.