Franchising a Hong Kong Business: Defining Insurance Responsibilities and Claims Procedures

Opening an existing business to franchising involves more than replicating its premises and service procedures: it also means reallocating risk. A customer injured in a shop, leaking equipment damaging neighbouring premises or a product causing harm may involve several different operators. Before recruiting franchisees, head office should draw up an insurance responsibility matrix and set out insurance, renewal and claims arrangements in the franchise agreement, giving the network clear, consistent procedures to follow.

1. Distinguish statutory duties from contractual requirements

Hong Kong currently has no legislation specifically governing franchising, nor any franchise-specific mandatory disclosure requirements, registration system or statutory code of conduct. The requirements of mainland China’s Regulations on the Administration of Commercial Franchises cannot simply be applied to arrangements confined to Hong Kong. Both parties must still comply with common law principles of contract and applicable general legislation.

For insurance, the Employees’ Compensation Ordinance (Cap. 282) requires employers to take out employees’ compensation insurance covering their relevant liabilities under statute and common law. A franchisee that employs its own shop staff cannot assume that head office’s policy fulfils its obligations as an employer. Where road vehicles are used, the requirements of the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap. 272) must also be considered.

Public liability, product liability and property insurance should not, however, be described as universally compulsory by law for all franchised outlets. Whether cover is required depends on the business, its licences, its lease and its contractual obligations. A franchise agreement may impose additional insurance requirements, but it cannot remove legal liability. Exclusion and indemnity clauses should be reviewed by a Hong Kong solicitor against applicable legislation, including the Control of Exemption Clauses Ordinance (Cap. 71).

2. Use a responsibility matrix to identify gaps in cover

Start by listing the activities actually carried out, rather than simply copying the insurance checklist for company-owned outlets. For each activity, identify the operating entity, potential losses, the party responsible for arranging insurance and the supporting documents required.

• Operating the outlet: Who signs the lease, controls the premises and is responsible for repairs? Check that public liability cover and cover for fit-out and equipment align with the lease requirements.
• Supplying products: Who manufactures, imports, repackages or sells the products? Product liability insurance may not cover recall costs, so this needs to be checked separately.
• Staffing arrangements: Who employs the shop staff? Ask an insurance professional to confirm cover for secondments, work across multiple outlets and training at head office.
• Deliveries and outsourced services: A contractor’s policy does not necessarily cover head office or the franchisee. Each must still assess its own liabilities.

Pay particular attention to the insured companies, addresses, business activities and exclusions stated in each policy. Sharing a brand does not mean sharing insured status. If head office is to be named as an additional insured, the insurer must actually confirm this; a statement in the franchise agreement alone is not enough.

Do not simply copy another brand’s cover limits. Assess appropriate limits with a licensed insurance intermediary, taking account of customer footfall, product risks, equipment values, lease requirements and an affordable excess. Also distinguish between the limit for each incident and the aggregate limit for the entire policy period.

3. Make insurance requirements specific and verifiable

The franchise agreement should specify the types of insurance required, minimum cover, permitted excesses and deadlines for submitting evidence of insurance and renewal. A requirement to buy ‘adequate insurance’ is too vague to assess reliably.

An insurance register can record the insured parties, policy period, scope of cover, limits and principal exclusions for each outlet. Head office should not rely solely on payment receipts: certificates of insurance, policy schedules and relevant endorsements help establish whether the cover meets the requirements. These documents are still no substitute for the full policy wording.

The agreement should also require franchisees to notify head office when they become aware of cancellation, non-renewal or a material change in cover, and specify a deadline for remedying any shortfall. If a gap in cover means the business cannot lawfully operate, a contractual grace period cannot override the statutory obligation.

Increasing insurance requirements later may raise franchisees’ costs. The grounds for reviewing cover, the notification procedure and reasonable transitional arrangements should be agreed in advance, rather than allowing unlimited additional obligations through updates to the operating manual. If head office arranges insurance centrally, it must also verify whether each franchise company is covered, whether limits are shared and how premiums and excesses will be allocated.

4. Align incident handling with claims procedures

After an incident, the first priority is to protect people and prevent further loss, not to decide who is responsible. Head office can introduce a standard incident report form recording the time, place, products involved, witnesses and immediate action taken, alongside arrangements to preserve relevant photographs, receipts and CCTV footage. Where personal data is involved, access and retention must be limited in accordance with the Personal Data (Privacy) Ordinance (Cap. 486).

The procedure should specify who notifies the insurer, who contacts the customer and who manages the claims documentation. Notification must meet the policy’s deadlines and must not wait until head office has completed its internal investigation. Legal liability should not be admitted, and a settlement should not be promised, without appropriate clearance, but necessary assistance should still be provided.

Finally, deal separately with insurance claims and the parties’ contractual liabilities. An insurer’s refusal to pay does not necessarily release either party from liability; equally, an insurance payment does not mean that every loss has been covered. The treatment of excesses, uninsured losses and incidents involving both parties should be agreed in advance and legally reviewed.

Practical takeaway: Before recruiting the first franchisee, use one pilot outlet to check four things: activities, responsible parties, insurance policies and incident procedures. Then have the arrangements reviewed by a solicitor and a licensed insurance intermediary. An effective insurance system is not just about collecting certificates: it ensures that everyone knows what to do next when an incident occurs.