Franchising: check your insurance before signing

Joining a franchise network does not mean you are automatically protected by the franchisor’s insurance. An injury to a customer, lost stock or an unexpected closure may remain the franchisee’s responsibility. Before choosing a brand and signing an agreement, you need to understand which risks are insured, who is covered and which costs your own business will have to bear.

1. Distinguish legal obligations from the brand’s requirements

In Italy, franchising is governed by Law No. 129 of 6 May 2004, which concerns relationships between legally and economically independent businesses. This independence also matters for insurance: operating under a shared brand does not automatically make the franchisor liable for every loss or injury occurring at an outlet.

The law requires the agreement to be in writing; otherwise, it is void. Article 4 also requires prospective franchisees to receive a complete copy of the agreement, together with the required annexes, at least thirty days before signing, subject to the specific confidentiality provisions set out in the law.

Use this period to review the insurance clauses too. Italian franchise law does not prescribe a standard insurance policy suitable for every business: you need to distinguish the insurance obligations that apply to your particular business from any additional cover required by the agreement.

Ask for a written list separating:

• insurance required by law, to be checked against the business’s activities and circumstances;
• cover required by the franchisor;
• optional protection recommended for the outlet’s actual risks.

Have an authorised insurance intermediary check the list. The brand’s approval alone does not establish that the protection is adequate.

2. Establish who is actually insured

The statement ‘we have insurance for the whole network’ is not enough. A policy taken out by the franchisor might protect only its own company, cover certain liabilities or apply only to specifically named outlets.

If the brand offers a group policy or a preferential insurance arrangement, ask for the full terms and documentation showing how your business will be included. A preferential arrangement may simply offer discounted terms, without providing automatic enrolment or cover.

In particular, check:

• policyholder and insured parties: who takes out the policy and which parties are protected;
• declared business activities: which operations, sales or services are actually covered;
• locations: whether the premises and any storage facilities are included;
• start date: when protection begins, including during fit-out and preparations for opening;
• termination: what happens to the cover when the franchise relationship ends.

Check any ancillary services too. Do not assume that home deliveries, work at customers’ premises or off-site events are covered without reading the terms. Ask for written confirmation from the insurer or intermediary, not just the brand’s sales representative.

3. Test exclusions and limits against practical examples

To assess a proposal, start with the risks your business faces rather than the policy’s name. Describe a few scenarios to the intermediary: a customer is injured on the premises, a water leak damages the neighbouring shop, an equipment breakdown spoils stock, or a fire leaves the outlet unusable.

For each scenario, ask which section of cover would respond and which conditions might prevent a claim from being paid. Liability insurance, property damage cover and business interruption insurance provide different forms of protection: having one does not mean you have the others.

Then examine four elements:

• Cover limit: the maximum amount payable under the relevant cover.
• Fixed and percentage excesses: the share of a loss you must bear under the policy terms.
• Exclusions and sub-limits: events that are not covered or are subject to lower limits.
• Policy conditions: maintenance, security measures and other requirements you must meet.

For business interruption insurance, pay particular attention to the event that triggers cover. A closure does not necessarily qualify for a payout simply because it prevents you from trading. The maximum period covered and the method used to calculate the loss can also make a substantial difference to the value of the protection.

4. Set out costs and responsibilities in the agreement

Before signing, obtain quotes based on your actual business activities and compare them with the contractual requirements. Look beyond the annual premium: factor in excesses and excluded risks when assessing the investment’s financial exposure.

Clarify whether you are free to choose an insurer, provided you meet the brand’s requirements, or whether you must use an arrangement specified by the franchisor. If the cost is passed on to you, ask how it is calculated and what documentation you will receive.

The agreement should also make clear who reports a claim, who deals with the insurer and who pays any amounts not covered. A clause requiring you to indemnify the franchisor is not the same as insurance cover: have your lawyer compare it with the policy terms.

In practice: before signing, draw up a table listing each risk, the cover provided, the insured party, the limit and the cost left for you to bear. Every empty box identifies a question to resolve before committing your capital.