Franchise insurance: shared minimum standards before your first franchisee

Insurance for a successful company-owned business is not, on its own, an insurance plan for a franchise network. Once independent businesses start using your brand, you need to clarify whose property, activities and liabilities are covered. Before signing up your first franchisee, do not simply hand over a copy of your existing policy: establish verifiable minimum insurance requirements that reflect how the network will actually operate.

1. Start with the risks in your own business

The first document in your insurance planning should be a brief risk register, not a request for a quote. Walk through your operating business and list the events that could cause property damage, customer claims or loss of revenue. Alongside past claims and losses, it is worth reviewing near misses.

For example, harm caused by food will carry a different weight in a hospitality business from professional errors in an education service. In a shop, stock, damage to rented premises and the risk of customer accidents may all be important. Sharing a brand name does not make these risks identical.

Create a simple table with the following columns:

• Event: what could happen during day-to-day operations?
• Affected party: could a customer, the franchisee, the franchisor or someone else suffer harm or loss?
• Responsible business: whose activities could give rise to the claim?
• Existing protection: what preventive measures and insurance are already in place?
• Open question: what needs to be clarified with an insurance professional?

Identify the franchisor’s own risks separately. A central warehouse, products supplied to franchisees or services provided by the franchisor may create liabilities that a franchisee’s business insurance does not necessarily cover. The aim of the register is not to insure every risk, but to identify gaps in cover consciously.

2. Distinguish legal requirements from contractual expectations

In Hungary, there is no general compulsory insurance requirement that applies to every franchise business simply because it operates under a franchise arrangement. However, specific legislation may require liability insurance or other financial security for certain activities. This must be checked against the particular service, the way the business operates and any applicable professional requirements.

Precision matters when describing the legal framework for franchising: Act V of 2013, Hungary’s Civil Code, expressly recognises franchise agreements. The Civil Code’s general rules on contracts, liability for damages and insurance are also relevant. It is therefore incorrect to say that franchising has no recognition at all in Hungarian law.

There is no general regulatory registration requirement exclusively for franchise systems, nor a standard mandatory franchise disclosure document. This does not, however, remove the duties to cooperate and provide information before entering into a contract. You should therefore explain the proposed insurance requirements and their likely cost implications to prospective franchisees before they commit.

The European Code of Ethics for Franchising is a self-regulatory framework, not legislation. Its principle of clearly defined responsibilities supports setting out insurance obligations unambiguously. Always distinguish contractual minimum insurance requirements from the statutory requirements attached to the activity concerned.

3. Specify cover requirements, not just policy names

A clause stating that “the franchisee must maintain appropriate insurance” is not enough on its own. Two policies with the same name may cover different events and have different exclusions and limits. Work with an insurance professional to define requirements that reflect the actual business activities.

Clarify at least the following:

• which business must be insured and which premises must be covered;
• which activities and loss events the insurance must cover;
• what per-claim and aggregate limits are appropriate;
• what excess the franchisee can fund from its own resources;
• which exclusions would create unacceptable gaps;
• whether property insurance, liability insurance or business interruption cover is needed.

Do not automatically set the same amount of cover for every outlet. Differences in size, stock value, services and customer footfall can create different levels of exposure. You can use a common baseline that must be increased in predefined circumstances.

Business interruption insurance deserves particular attention: it does not necessarily cover every loss of revenue and is often linked to a specified insured property damage event. Check the waiting period, indemnity period and eligible costs separately.

If you arrange a shared insurance solution, have an expert establish exactly who is insured and whether losses at several outlets could exhaust the same aggregate limit. The convenience of a shared policy is no substitute for understanding its cover.

4. Put verification and claims procedures in place

The agreement should set out the obligation to maintain insurance, how compliance must be evidenced and the process for resolving any shortfall. The operations manual should cover the day-to-day procedure: who collects evidence of insurance, when expiry dates are checked and who must be notified of changes.

The existence of a policy does not, by itself, prove that cover is current and adequate. Check the insured party’s name, activities, premises and limits, as well as whether premiums are up to date where necessary. Make a review mandatory when a new service is introduced or stock levels increase significantly.

Following an incident, the franchisee must know how to ensure safety, document what happened and meet the insurer’s notification deadlines. Notifying the franchisor is not a substitute for notifying the insurer. Assign separate responsibility for communications on behalf of the shared brand and for handling the individual claim.

Practical takeaway: before signing up your first franchisee, prepare a risk register, minimum cover requirements checked by a professional and a simple process for verifying insurance. This way, your franchise network will do more than collect policies: it will actively manage the financial risks of its operations.