Buying a Franchise in India: How to Check the Insurance Terms

Treating insurance as just another piece of paperwork before opening a franchise can prove costly. If a fire breaks out, equipment fails or a customer is injured, your contractual liability may differ from the amount insurance will pay. Before signing, a new franchise buyer needs to understand which risks will be insured, whose name the cover will be in and which losses they will still have to pay for themselves, even after an insurance payout.

1. Separate contractual insurance requirements from legal obligations

India has no separate national franchising law, central franchise registration system or mandatory pre-sale disclosure document. Do not therefore assume that the franchisor will automatically provide full insurance information. The Indian Contract Act, 1872 provides the main framework governing the formation, performance and breach of franchise agreements; general rules on fraud and misrepresentation are also relevant.

Insurance arrangements are governed by the Insurance Act, 1938 and the applicable rules and regulations of the Insurance Regulatory and Development Authority of India. Other laws may also apply, depending on the nature of the business. It is not safe to assume that every franchise needs the same insurance policy or a fixed level of cover.

Ask the franchisor for a written list stating whether each policy is required by law, the premises lease, a lender or the franchise agreement. If a requirement is described as a legal obligation, ask for its legal basis. Have a lawyer review your liabilities and an insurance adviser review the cover separately: they address different questions.

2. Check who the policy actually protects

Hearing that “all our outlets are insured” is not enough. The brand’s policy may cover only the franchisor’s property or legal liabilities. Check the documents to establish whether your rented premises, purchased equipment, stock and operating entity are included.

Before paying, obtain the proposed policy details, schedule, wording and any relevant endorsements. In particular, check:

• Whether the legal name of the insured matches your operating entity.
• Whether the outlet’s correct address, business activities, equipment and stock are listed.
• How hired equipment and the landlord’s property are treated.
• How much cover is provided for liability for harm to customers or other people.
• Whether any specific interest of a lender or the franchisor is noted, and how this would affect a claim payout.

If there is a shared policy, ask whether your outlet has its own cover limit or whether the limit is shared across the network. A large claim from another outlet could reduce the cover available if the policy is structured that way. Do not assume you are fully protected simply because you have seen an insurance certificate.

3. Look beyond the premium at the true costs and exclusions

A cheaper policy does not necessarily mean less financial risk. The excess is the amount you may have to pay yourself even when a claim is accepted. Some losses may also be excluded, others may have lower sub-limits, and some risks may require additional cover.

For example, cover for fire damage to equipment does not necessarily mean that rent, wages and lost income will be paid during repairs. If business interruption insurance is included, read the conditions that trigger cover, the waiting period and the period for which payments can be made. Not every type of closure is automatically covered.

Ask an insurance adviser to set out three plausible loss scenarios for your outlet, explaining the likely cover and your out-of-pocket costs for each. The treatment of poor maintenance, theft, flooding, electrical faults or stock spoilage caused by temperature changes can vary between policies.

Alongside the annual premium, allow room in your budget for the excess and uninsured losses. If you are charged for a policy purchased by the franchisor, ask how the premium is calculated, what taxes and administration fees apply, and for proof of payment.

4. Agree the claims process and responsibilities in advance

Even good cover may be compromised if an incident is reported late or essential records are unavailable. Make sure the agreement and insurance procedures establish who will notify the insurer, what role the franchisor will play and who will gather the documents. Do not assume that notifying the brand is a substitute for notifying the insurer.

Put the following in writing:

• Who will renew the policy and when they will provide a copy of the new policy.
• How you will be told if cover lapses or the policy is cancelled.
• Who will receive the claim payment and how it will be used to replace equipment.
• How responsibility will be determined if an administrative failure by the franchisor affects a claim.

Before opening the outlet, keep invoices, stock lists, equipment serial numbers, photographs and maintenance records safely. After a loss, follow the policy’s requirements for repairs or disposal of damaged items.

Practical takeaway: Read the franchise agreement, insurance policy and cost estimates together. Commit to the investment only once you are clear about who is insured, what is excluded and how much you could still have to pay yourself if a loss occurs.