Franchising: arranging insurance for franchisees

Turning an existing business into a franchise network also means preparing for the unexpected: a customer injury, a breakdown that halts operations or a product that causes damage. The insurance policy for your original outlet will not automatically suit your franchisees. Before offering franchises, you need a shared approach to identifying risks, allocating responsibilities and checking cover, without promising complete protection.

1. Start with the risks, not a standard policy

The first step is to describe what actually happens in your business. Involve those who run the existing outlet and review incidents, near misses and interruptions: even events with no financial consequences can help identify the most significant exposures.

Prepare a matrix with four columns: potential event, parties involved, financial consequences and preventive measures. For example, a water leak could damage stock, premises and neighbouring properties, as well as temporarily prevent the outlet from opening. A single type of cover may not cover all these consequences.

Distinguish at least between:

• injury or damage affecting customers, staff and third parties;
• damage to premises, equipment and stock;
• liability arising from products or services;
• business interruption and the costs of restarting operations;
• cyber incidents, where operations depend on digital systems.

This matrix is a planning tool, not a list of compulsory insurance policies. Requirements vary according to the business activity, location, assets used and services offered. Have it reviewed by an authorised insurance intermediary, explaining any anticipated differences between the original outlet and future franchised units.

2. Separate legal obligations from network requirements

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Among other things, the law requires the agreement to be in writing to be valid, but it does not introduce a universal compulsory insurance policy for every franchise relationship.

Any insurance obligations instead arise from the rules applicable to the individual business, its activities and the risks involved. Compulsory employment-related protection, where required, should not be confused with private liability insurance. Obligations relating to catastrophe risks also require a specific check of the businesses, assets and rules concerned.

The franchisor may set additional contractual insurance requirements. However, it must clearly distinguish these from legal obligations and ensure they are proportionate to the operating model.

Article 4 of Law No. 129/2004 requires a complete copy of the agreement and the prescribed attachments to be provided at least thirty days before signing. If you require franchisees to take out cover, include those requirements in the contractual documentation supplied, rather than introducing unexpected demands after signature.

Have a lawyer review the clause and an insurance professional check the technical details. An internal allocation of duties does not automatically remove liability towards third parties.

3. Set verifiable requirements and explain the costs

Simply stating that ‘the franchisee must be adequately insured’ leaves too much room for interpretation. A useful requirement identifies the risks to be covered and the documents needed to demonstrate that cover is in place, without becoming a promise about the outcome of any claim.

For each required type of cover, clarify:

• who must be insured and which activities are included;
• which locations and assets must be covered;
• the criteria for setting indemnity limits, fixed excesses and percentage-based amounts payable by the insured;
• the exclusions that need particularly careful consideration;
• when cover must take effect and how renewal must be documented.

Do not simply copy your own business’s indemnity limits without analysis: a location with higher footfall or stock of a different value may require a different assessment. Also check whether deliveries, work carried out off-site and ancillary services are actually included.

Obtain quotations that reflect the franchisee’s risk profile and include the estimated premium among the recurring costs in the start-up budget. Make clear that a quotation does not guarantee future terms or the insurer’s acceptance of the risk.

If you offer a negotiated insurance arrangement, explain who takes out the policy, who pays and how renewals are managed. A policy in the franchisor’s name does not necessarily protect every franchised business: you need to examine the actual scope of cover under the contract.

4. Prepare a procedure for dealing with incidents

Your claims procedure must be ready before opening. Appoint a contact person within the franchisor’s organisation and ensure every franchisee knows the insurer’s contact details, the policy’s notification deadlines and which documents to retain.

The procedure should explain how to make people and premises safe, collect photographs and witness accounts, retain invoices and report service interruptions. Reporting an incident to the franchisor is not a substitute for notifying the insurer.

Avoid admissions of liability or improvised compensation agreements, without hindering assistance to those involved. Share only the personal data needed and restrict access to the documentation.

Practical tip: before welcoming your first franchisee, complete three things: a risk matrix, contractual insurance requirements and a claims procedure. Within a franchise network, effective protection comes from clearly defined responsibilities, not simply from having an insurance policy.