Buying a Franchise in Malaysia: Check Your Insurance Cover

Before buying a franchise in Malaysia, do not assume that “insurance included” means every risk at your outlet is covered. The franchisor’s policy may not cover your company’s assets, employees or liabilities. Reviewing insurance before signing the franchise agreement helps you identify the true costs and any losses you would still have to bear yourself.

1. Identify your obligations under the agreement

Start by requesting all insurance-related clauses, including schedules of cover and requirements in any manuals referred to in the contract. Establish who must purchase the policies, when cover must begin, the minimum limits of cover and who must be named as an insured party.

Distinguish between three things: cover required by the franchise agreement, cover required by the landlord or lender, and additional cover recommended for your business risks. These may overlap, but their scope is not necessarily the same.

Malaysia regulates franchising through the Franchise Act 1998 (Act 590), as amended, including the 2020 amendments. Under section 15, the franchisor must provide prospective franchisees with the disclosure document and a copy of the franchise agreement at least 10 days before the agreement is signed. Use this review period to examine your insurance obligations with a lawyer and obtain quotations.

Do not confuse a brand’s insurance requirements with general obligations under the Franchise Act. If the franchisor says particular cover is “required by law”, ask for the legal basis and an explanation of how it applies to your outlet’s activities.

2. Match the policies to your outlet’s risks

A list of policy names is not enough. Give an insurer or suitable insurance intermediary a description of your actual operations: the types of products, kitchen use, stock storage, deliveries, installation work and interactions with customers. Activities that have not been disclosed may lead to disputes over the scope of cover when you make a claim.

Review the following categories according to their relevance to your business, rather than treating them as a compulsory shopping list:

• Property and stock: Does the cover include fit-out works, machinery, customers’ goods and stock held at other locations?
• Public liability: What cover applies if a customer is injured or their property is damaged in an incident connected with the outlet’s operations?
• Product liability: Are claims relating to products you sell included, or is separate cover needed?
• Business interruption: What events trigger cover, and what waiting period and indemnity period apply?
• Specific risks: Do machinery breakdown, deterioration of refrigerated stock or cyber risks require an extension or a separate policy?

Business interruption cover, in particular, does not guarantee a payout whenever an outlet closes. Many policies link this cover to insured physical damage. Do not assume that closures caused by supply problems or orders from the authorities are included without checking the policy terms.

Ask for written explanations of the main exclusions. Marketing summaries are no substitute for the policy schedule, full wording and any endorsements that alter the cover.

3. Calculate the costs you will still bear yourself

Include insurance premiums in your start-up budget and ongoing expenses. However, premiums are not the only figures that matter. Check the excess or deductible—the portion of a claim you must pay yourself—as well as any sub-limits for particular categories of loss.

Obtain quotations based on your own outlet’s details, rather than estimates for a sample outlet with a different size or activities. Ensure that asset values reflect the valuation basis used by the policy. Underinsurance may affect the amount of compensation, depending on the policy terms.

Test a simple scenario without assuming that a claim will necessarily be approved: a key machine breaks down, stock is affected and the outlet temporarily stops trading. Ask:

1. Which policy might cover each loss?
2. What excesses, sub-limits or exclusions apply?
3. Which expenses will need to be paid before the claim is settled?
4. Will royalties, rent and wages still be payable during the closure?

If the franchisor offers a group policy, request a breakdown of the charges and how they are allocated. Check whether the limits of cover apply separately to each outlet or are shared across other outlets. Also ask how claims by other outlets could affect the remaining limits and the renewal of your cover.

4. Establish who will manage claims

Before committing, make sure the name of the insured entity matches the company operating your outlet. Simply naming the brand does not prove that your company is insured. Request specific confirmation from the party providing the cover.

Agree who will report incidents, gather evidence, liaise with the insurer and receive claim payments. Also check whether the landlord’s or lender’s interests affect how compensation can be used to repair and reopen the outlet.

Review the agreement’s indemnity clauses with a lawyer. Your obligation to compensate the franchisor may be broader than the cover provided by the policy. Insurance will not necessarily cover every liability you accept under a contract.

Practical action: Before signing, prepare a table matching each contractual obligation to the relevant policy, limits, exclusions and out-of-pocket costs. Do not proceed on the strength of a general promise that “everything is covered”; obtain evidence of cover and explanations for every significant gap.