Hong Kong Franchise Insurance Guide: Check Responsibilities, Cover Gaps and Excesses Before Signing

When buying a franchise in Hong Kong, insurance is often treated as an incidental task to deal with just before opening. Yet a customer injury, damaged equipment or a temporary closure could leave the franchisee facing costs well beyond their budget. What matters is not whether the brand has an insurance policy, but whether your operating company, premises and actual business activities are covered — and who bears any uninsured losses after an incident.

1. Distinguish between statutory insurance and contractual requirements

Hong Kong has no franchise-specific legislation, nor any generally applicable franchise registration requirement, mandatory pre-contract disclosure regime or statutory franchise code. Insurance arrangements between franchisors and franchisees are largely determined by contract, but applicable general law must still be observed, including common law contract principles and the Misrepresentation Ordinance. A brand’s claim that “all risks are covered” is no substitute for checking the policy.

If a franchisee employs staff, the Employees’ Compensation Ordinance (Cap. 282) requires the employer to take out employees’ compensation insurance covering its legal liability for work-related injuries to employees. Both full-time and part-time employees must be considered. If the business involves the use of vehicles, check the applicable requirements under the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap. 272) as well.

Public liability, property and business interruption insurance should not be described as statutory requirements for every shop. However, a lease, franchise agreement or specific licensing conditions may require them. The Occupiers Liability Ordinance (Cap. 314) concerns occupiers’ liability towards visitors and others, but does not itself impose a general requirement for shops to buy public liability insurance.

Start with a checklist, classifying each type of insurance as “required by law”, “required by contract” or “recommended based on risk”. Then ask a solicitor and a licensed insurance intermediary to review it.

2. Check the actual cover, not just the insurance certificate

The franchisor’s policy may cover only company-owned outlets, or protect only the franchisor itself. Even if the franchisee is named as an additional insured, cover may be limited to certain liabilities. This is not the same as having comprehensive insurance for your outlet.

Before making a payment, request the policy schedule, full wording and endorsements. If insurance has not yet been arranged, ask for a specific quotation and details of the proposed cover. Key points to check include:

• Insured entity: Does the policy state the legal name of the company actually operating the business, rather than just the brand name?
• Business activities: Do dine-in service, takeaway sales, deliveries, online sales and services at customers’ premises match the activities declared to the insurer?
• Property interests: Who insures the fit-out, hired equipment, stock and equipment supplied by the brand?
• Policy limits: Is the limit per incident or an annual aggregate? Is it shared across several outlets?
• Exclusions: Are flooding, equipment breakdown, food contamination or cyber incidents excluded, or do they require additional cover?

If several franchise outlets share a policy, a substantial claim from another outlet could use up the shared limit. Ask the franchisor to explain what happens if the limit is exhausted, and how franchisees will be notified of renewals, cancellations or reductions in cover.

3. Budget for premiums, excesses and gaps in business interruption cover

When comparing franchise brands, do not focus solely on annual premiums. Include policy excesses, potential losses from excluded risks, and the cost of any security or fire safety improvements required to obtain insurance in your funding budget.

Business interruption insurance is particularly prone to misunderstanding. Many policies require insured property damage to occur before the relevant cover is triggered. Falling turnover, reduced footfall caused by nearby construction work, or a supplier’s failure to deliver may not qualify for a claim. The indemnity period may also be too short to cover the time needed to refit the premises, replace equipment and rebuild your customer base.

Test the quotation against a practical scenario: a water leak damages equipment and forces the outlet to close, while rent, wages and fixed contractual charges remain payable. Ask the intermediary to explain, item by item, what would be covered, how the payment would be calculated, how long you would have to wait and which costs you would need to bear yourself.

Claims can also take time to settle. Even if you expect a payout, you still need enough working capital to pay the excess, fund emergency repairs and meet ongoing expenses. Do not treat an unapproved claim as immediately available cash.

4. Set out insurance and claims responsibilities in the franchise agreement

A contractual requirement to “maintain adequate insurance”, without specifying the types of cover and limits, can lead to unexpected costs just before opening. Use a schedule to set out the minimum requirements, who must arrange the insurance, how it will be paid for, the evidence required on renewal and the procedure for making changes.

If the franchisor arranges insurance centrally, specify how costs will be allocated, whether any administration fees apply and which documents the franchisee can obtain. If the franchisor can increase insurance requirements unilaterally, seek a reasonable notice period and a mechanism for discussing the resulting costs.

Check the indemnity clauses too: the liabilities the franchisee agrees to assume towards the franchisor may be broader than the policy’s cover. Do not assume that an insurer will pay every loss simply because you have signed a clause making the franchisee responsible for “all losses”. Ask a solicitor to review the scope of liability, then have the intermediary confirm the corresponding insurance cover.

Finally, set out procedures for reporting incidents, preserving evidence, notifying insurers and handling third-party claims. Avoid admitting liability or agreeing a settlement without any required consent. The allocation of responsibilities between franchisor and franchisee cannot, by itself, restrict the legal rights of injured customers or other third parties to seek compensation.

Practical takeaway: Before signing, prepare a table showing “who arranges the insurance, what is covered, the policy limits, the excess and what is excluded”. Resolve any gaps in the information before deciding whether your franchise budget can absorb the remaining risks.