Arranging insurance before opening your first franchise outlet

Turning your existing business into a franchise also changes your risk profile. You are no longer insuring only your own operations: independent business owners will be using your franchise model. Everyone in the franchise network needs to understand who bears which risks. An insurance plan helps prevent everyone from assuming that a loss is ‘covered somewhere’.

1. Map out the new allocation of risks

Start not with a list of policies, but with the activities of your future franchise outlet. Who sells to the customer? Who signs the lease? Who employs staff? And who supplies products, equipment or digital advice? The answers help determine where liability and insurance needs may arise.

For each activity, create an overview with four columns: the business responsible, a potential loss or claim, existing cover and any gap requiring further investigation. Include both your own business and the prospective franchisee. A franchisor’s insurance does not automatically cover an independent franchisee, even if they use the same trading name.

Consider, for example:

• a customer injured because the premises are unsafe;
• water damage to stock or equipment;
• loss of revenue following a fire or another insured event;
• an error in instructions issued centrally;
• an IT outage affecting several outlets.

Look out for shared causes too. If you supply a defective product centrally and the franchisee sells it, several parties may become involved in a claim. Ask an adviser to assess not only individual policies, but also how they fit together.

2. Have your own cover reassessed

Your existing insurance was taken out on the basis of the activities you declared at the time. Developing and supporting a franchise network, and allowing others to operate under your franchise model, may fall outside that scope. Tell your insurance adviser about this expansion and obtain written confirmation of which activities are covered.

In particular, discuss the difference between losses arising from your own business operations and those arising from your role as franchisor. Business liability insurance generally does not automatically cover pure financial loss caused by incorrect advice. Whether additional professional indemnity cover is suitable and available depends on your activities and the policy terms.

For the franchisee, relevant cover may include business liability, business contents, stock, business interruption and legal expenses. Cyber cover also deserves attention where operations depend on digital systems. This is not a universally compulsory package: the right combination depends on the activities, assets and contractual obligations involved.

For business interruption insurance, also check what triggers cover. Revenue lost because of an outage at the central franchise organisation is not automatically covered by a policy that responds only to physical damage at the franchisee’s own premises. Dependencies like these are particularly easy to overlook.

3. Make insurance requirements specific and legally clear

The Netherlands has a Franchise Act (Wet franchise), incorporated into Book 7 of the Dutch Civil Code, Articles 7:911 to 7:922, since 1 January 2021. This legislation does not prescribe a standard insurance package for all franchises. However, duties relating to proper conduct as a franchisor and pre-contractual disclosure are among the considerations relevant to any insurance requirements you impose.

If compulsory insurance creates costs for the franchisee, explain those requirements and their financial implications in advance. Include them in the draft agreement or a clearly worded schedule. These documents form part of the information the candidate must receive in good time before signing; allow for the statutory period of at least four weeks. State the assumptions behind any cost estimate and ask the candidate to obtain their own quotation.

Then specify:

• which risks must be insured;
• what cover and levels of insurance are appropriate;
• who pays the premium and any excess;
• what evidence of cover must be provided;
• how the parties will handle cancellation, exclusions or changes to policy terms.

Do not choose insurance limits on instinct or simply copy another franchise network. Have them assessed against potential losses and available cover. Align liability clauses with the policies: a contractual indemnity may extend beyond what the insurer will pay.

Are you offering a group insurance arrangement? Have your permitted role assessed in advance. Insurance broking or advice may fall within the scope of the Dutch Financial Supervision Act (Wet op het financieel toezicht). Where necessary, leave this to an appropriately authorised provider.

4. Test the claims procedure before opening

Work through one realistic loss scenario with the candidate, such as a leak that forces the outlet to close temporarily. Who takes action to limit the damage, who notifies which insurer, and who communicates with customers? Also check who has access to proof of purchase, stock records and sales records.

Document the key contacts and reporting steps. Agree that neither party will admit liability or commit to a settlement without consulting their insurer. Keep evidence of insurance up to date and arrange a review whenever activities, locations or central systems change.

The practical takeaway: before the first outlet opens, make clear who is responsible for each significant risk, which policy might respond and what action is needed if a loss occurs. Sharing a brand name does not mean sharing insurance cover.