Buying a franchise: check the insurance requirements

A well-known franchise brand inspires confidence, but it does not automatically protect your business against loss or damage. As an independent business owner, you need to know which insurance policies you must arrange yourself and what any group policy actually covers. Clear agreements matter across the franchise network: an incident at your outlet can also affect customers, employees and others. Before signing, check how the contractual insurance requirements fit your day-to-day operations.

1. Gather all the insurance requirements

Start with the draft franchise agreement, but do not stop there. Insurance requirements may also appear in appendices, the franchise operations manual or a separate agreement governing participation in a group insurance scheme. Request the documents referred to in the contract, including the applicable versions.

Then draw up a summary of each requirement, covering:

• the risk you must insure against;
• the required sum insured and excess;
• who the policyholder and insured parties are;
• who pays the premium and any additional costs;
• what evidence of cover you must provide;
• the date on which cover must begin.

Also ask whether you can choose your own insurer. A compulsory group scheme may be convenient, but do not compare premiums alone. Cover, exclusions, claims handling and options for arranging additional protection also matter.

The distinction between a statutory obligation and a contractual requirement is essential. In the Netherlands, business liability insurance is not generally required by law for every business. Your franchise agreement may nevertheless make it compulsory. Specific activities or professions may also be subject to their own statutory insurance requirements.

2. Make use of the disclosure requirements under the Dutch Franchise Act

The Dutch Franchise Act has been in force since 1 January 2021 and is incorporated into Book 7, Title 16 of the Dutch Civil Code. Among other things, it requires franchisors to provide the draft agreement, its appendices and information about relevant financial obligations before the agreement is signed.

Compulsory insurance deserves attention as part of this disclosure. Ask what cover the franchise requires, whether participation in a group scheme is compulsory and what costs are involved. Does the premium depend on your turnover, activities or claims history? If so, have the method for calculating it and the information needed for a quotation set out in writing. Do not treat an initial estimate as a guaranteed price.

As a rule, the information required by law must be available at least four weeks before the franchise agreement is entered into. Make reviewing insurance part of your due diligence, rather than an administrative task to deal with after signing.

As a prospective franchisee, you also have your own duty to investigate: within reasonable limits, take steps to avoid making a decision based on incorrect assumptions. A written assessment by an independent insurance adviser can help. That assessment does not replace the franchisor’s disclosure obligations.

3. Check who and what is actually insured

Being told that ‘the franchise is insured’ is not enough. A franchisor’s policy may cover only its own liability or assets. Your business is not automatically included, even if you use the same name and branding.

Ask for the relevant policy wording and confirmation of your status as an insured party. Check that your correct legal entity, business address and activities are listed. Remember to include deliveries, work at customers’ premises and temporary sales away from your usual location.

Discuss some specific scenarios with your adviser:

• Injury or damage to a customer: does the liability cover apply to injury or damage caused during your work?
• Fire or water damage: are your stock, business contents and improvements you have made to the premises insured?
• Temporary closure: when does business interruption insurance cover loss of income, and for how long?
• IT disruption: what happens if the central point-of-sale system fails or suffers an incident?

Business interruption insurance does not automatically cover every fall in turnover. The policy wording determines which events are insured and what waiting periods or restrictions apply. Losses arising from IT incidents also need a separate assessment: a central IT provider or franchisor does not automatically bear all your losses.

For a group policy, also check whether the cover limit applies to each outlet individually or is shared by several participants.

4. Document procedures and remaining risks

Effective cover also requires workable procedures. Who reports a claim, within what timeframe and to whom? Can you appoint a repair contractor yourself? What security measures, inspections or maintenance checks does the policy require? Failure to comply may affect a claim payout.

Make sure the start date reflects when your risks actually begin. Loss or damage can occur during refurbishment, stock deliveries or training, before the official opening. Also ask what happens to group cover when you leave the franchise network.

Include premiums, excesses and risks you deliberately leave uninsured as separate items in your budget. Have a lawyer check whether any liability or indemnity provisions go beyond what your insurance covers.

Practical conclusion: sign only when you can identify, for each compulsory policy, who is insured, what the cover costs, which restrictions apply and who handles a claim. A detailed policy review provides more certainty than a promise that everything is arranged centrally.