Franchise insurance: what should you check before buying?

When assessing a franchise offer, it is easy to focus on the initial fee and royalties while overlooking insurance obligations tucked away in a few lines of the contract. Yet damage to your premises, an accident involving a customer or a prolonged business interruption can reveal how much your chosen protection is really worth. Before joining a franchise network, ask for more than an insurance quote: establish which losses you would have to bear if the insurer pays nothing or only part of the claim.

1. Separate legal requirements from contractual obligations

Hungary has no standalone, comprehensive franchise act, but that does not mean franchising is unregulated. Act V of 2013 on the Civil Code specifically recognises franchise agreements in Sections 6:376–6:381. General contract rules, provisions governing insurance contracts and regulations applicable to the particular business activity also matter.

Operating as a franchise does not, in itself, create a uniform compulsory insurance requirement for every franchisee. Insurance may be required by the laws governing your business activity, but it may also be demanded by the franchisor, landlord or lender. List these requirements separately: you may need to provide evidence to different parties, and the consequences of cover lapsing may vary.

The European Code of Ethics for Franchising, adopted by the Hungarian Franchise Association, calls for obligations and responsibilities to be clearly set out in the contract. It is an industry self-regulatory document, not legislation, and it does not replace the terms of an insurance policy. Your contract should therefore clearly specify the protection you must maintain.

2. Ask for a precise list of insurance requirements

A phrase such as “maintain adequate insurance” is not enough for budgeting. Ask for a schedule detailed enough for an insurance intermediary or insurer to prepare a firm quote. It should answer at least the following questions:

• What types of insurance must you take out, and which activities must they cover?
• What sums insured or limits of indemnity are required?
• Are there limits per claim and annual aggregate limits?
• What level of excess is acceptable?
• When must cover begin: during the fit-out or only when the business opens?
• Who checks the policy, and what evidence do they require each year?

Distinguish property insurance from liability insurance. The former may cover damage to specified assets; the latter may cover liability for harm caused to others. Neither automatically means that all your business losses will be reimbursed.

If the franchisor offers a group insurance programme, ask for the terms that apply to you. Do not assume that head office’s insurance extends to your own business. Clarify your status as an insured party, which premises are insured and whether claims by other franchisees could reduce the shared annual limit available to you.

3. Match the cover to your actual operations

Do not simply compare policy names with the franchisor’s checklist. Describe your planned operations: will you offer deliveries, carry out on-site installation or work at customers’ premises, handle food or use subcontractors? Insurers may treat these activities differently, so ask for written confirmation about each one.

Also establish who owns the equipment and stock. Hired machinery, leased equipment or goods that remain the franchisor’s property may not be treated in the same way as assets you own. Check whose interest the policy covers and to whom the insurer may make a payment.

Contractual liability and insurance cover are not the same thing. If you accept broader-than-usual liability towards the franchisor, that does not mean your insurer will cover it. Have the liability provisions in the franchise agreement reviewed alongside the policy exclusions.

Ask about any required security and property protection measures too. Alarms, maintenance and storage rules are not merely administrative details: failing to comply may affect your insurance, depending on the policy terms and the circumstances.

4. Calculate the costs you would still face during a business interruption

Even where property damage can be repaired, a temporary loss of revenue can cause serious problems. Rent, some wage costs and contractual fees may still fall due. When considering business interruption insurance, check what event triggers cover, whether there is a waiting period and how long payments can continue.

Do not assume that every closure is an insured event. Check the policy terms specifically for service-provider outages, action by public authorities and IT failures.

Set out three separate budget items: the annual insurance premium, the excess you would pay following a claim and a reserve for uninsured losses. Also check the franchise agreement to see whether any fees are suspended during an enforced closure. An insurance payout and the fees payable to the franchisor are separate matters; neither is automatically resolved by the other.

5. Agree the claims procedure as well

Before signing, clarify whom you must notify when a loss occurs and within what deadlines. Notifying the franchisor does not necessarily replace notifying the insurer. It should also be clear who can authorise repairs, how damage will be documented and what approval is needed before reopening.

Ask for a clear procedure in case the franchisor later demands a higher level of cover. This should include written notice, a realistic deadline for compliance and an agreed approach if the required protection is unavailable on the market.

Practical takeaway: only consider your insurance obligations fully costed once the franchise agreement, the insurance quote and your own contingency reserve plan all reflect the same planned operations. Have legal and insurance professionals check this before you sign.