Buying a Franchise: Check the Outlet’s Insurance Requirements

Before buying a franchise, do not stop at asking whether the outlet is insured. More important questions are who is covered, which risks are insured and who receives payment when a loss occurs. Franchise agreements may require you to take out insurance, but having a policy does not in itself guarantee that the cover meets the franchisee’s needs.

1. Distinguish contractual obligations from legal requirements

Indonesia’s Government Regulation No. 35 of 2024 on Franchising provides the regulatory framework for franchises in the country, replacing Government Regulation No. 42 of 2007. It covers matters including franchise criteria, offering prospectuses, franchise agreements and the Franchise Registration Certificate, known locally as the STPW.

Franchisors must provide prospective franchisees with an offering prospectus at least 14 calendar days before the agreement is signed. Use this review period to request the draft contract and any annexes setting out insurance requirements, rather than simply reading the list of opening costs.

Do not assume that every insurance requirement imposed by a brand is a legal obligation under Indonesia’s franchising regulation. Requirements such as specific cover limits or naming the franchisor as an insured party need to be checked for their basis and wording. Additional obligations may also arise from a lease, a financing agreement or rules applying to particular business activities.

Ask the franchisor to explain in writing:

• Which types of policy are required and when cover must begin.
• Whether the franchisee is free to choose an insurer.
• Whether insurance is purchased independently or through a network-wide arrangement.
• Who checks that the cover is adequate and handles renewals.

If the answer is simply “in accordance with head office requirements”, ask for those requirements to be attached before agreeing to the contract.

2. Match the cover to the outlet’s risks

Start with a list of events that could disrupt the outlet, rather than looking for the cheapest premium. Food outlets, cleaning businesses and retail shops have different needs. Even outlets operating under the same brand may face different risks because of their location, premises and operating practices.

Create a simple table showing the risk, what is insured, the relevant policy, exclusions and who bears the loss. Check at least the following three areas.

First, damage to assets: equipment, stock, and any parts of the building or fit-out for which you are responsible. Make sure the address and business activities stated in the policy reflect the actual situation. Do not assume that the landlord’s buildings insurance also covers all the outlet’s contents.

Second, liability to others, for example if a customer suffers an injury alleged to be linked to the condition of the outlet. Ask whether the proposed cover includes your business activities and how liability claims are handled.

Third, business interruption. Insurance covering damage to equipment does not automatically compensate for income lost while the outlet is closed. If business interruption cover is included, check the events that trigger it, any waiting period, the indemnity period and the financial evidence required.

For each area, read the exclusions and any security or safety conditions. Do not assume that risks such as flooding, machinery breakdown or loss of stock are automatically covered. Ask the insurer or a licensed insurance broker for a written explanation if the policy wording is difficult to understand.

3. Calculate the costs and clarify who is covered

An insurance budget involves more than premiums. There is also the excess: the portion of a loss that the insured must bear under the policy. You may also face costs to meet security or safety requirements, as well as additional premiums if asset values or business activities change.

Request a written quotation based on the outlet’s actual circumstances. Then record the initial costs, estimated renewal costs and a contingency reserve for losses that will not be reimbursed. The first-year premium is no guarantee that costs will remain the same throughout the franchise agreement.

Check each party’s status under the policy too. The policyholder, the insured, any additional insured parties and the recipient of claim payments may have different roles. If the franchisor must be named, ask why and what the scope of its cover will be.

Do not assume that naming the franchisor automatically entitles it to receive all claim payments. If equipment is financed, also check whether the policy provides for payments to the finance provider. These arrangements must be consistent across the documents so that discrepancies do not delay the funds needed to restore the outlet.

4. Agree the claims procedure before signing

Ask for a clear incident-handling procedure: who notifies the insurer, who gathers evidence and who authorises repairs. Reporting deadlines must follow the policy, not simply the network’s usual practice.

Make sure you receive copies of the policy, the summary of cover, any policy amendments and proof of premium payment. If insurance is arranged across the network, request evidence that your outlet is covered, along with an explanation of whether cover limits are shared with other outlets.

The contract should also state who bears any shortfall in claim payments and how business obligations are treated during a closure. Do not assume that royalties or other obligations automatically stop because an insured event has occurred.

Practical step: before buying, review the franchise agreement, insurance policy and budget together. Proceed once the cover, costs, insured parties and claims procedure can all be explained clearly and consistently in writing.