Franchising in the Philippines: Check the Insurance Requirements

Before buying a franchise in the Philippines, do not just ask how much the equipment and initial stock will cost. Find out what insurance you must take out and maintain. The franchisor may set insurance standards, but that does not mean every risk is covered. The key is to check that the contract, day-to-day operations and protection set out in the policy all align.

1. Identify where the obligation comes from

Ask for the full insurance clause, together with any accompanying standards. The obligation to take out insurance may appear in the main agreement, while the required level of cover, risks to be insured and proof of payment may be set out in a separate document.

The Philippines has no single comprehensive franchise law. However, Executive Order No. 169, issued in 2022, provides protections and requirements for agreements within its scope involving small businesses. General contract law also applies: under Article 1306 of the Civil Code, the parties may agree terms provided these do not contravene the law, morals, good customs, public order or public policy.

Franchise agreements that qualify as technology transfer arrangements are also subject to the prohibited and mandatory provisions in Sections 87 and 88 of Republic Act No. 8293, or the Intellectual Property Code.

These rules do not automatically prescribe a standard insurance package for every franchise. Distinguish between requirements imposed by the contract, the landlord, the lender and any laws applicable to the business itself. Have a lawyer review them; do not mistake a brand's own standards for a general legal obligation.

2. Match the cover to the actual risks

Ask the insurer for a sample policy and a written quotation. A certificate stating that the business is insured is not enough. You need to see the full terms, exclusions and claims procedure.

Make a list of what could happen at your chosen location:

• Property damage: Which equipment, stock and fit-out works are covered? Who owns them?
• Public liability: Is there protection if a customer is injured or someone else's property is damaged as a result of your operations?
• Product-related harm: Does the policy cover the type of product you will sell and the harm it could cause?
• Business interruption: Is lost income covered, and what event must occur before that cover is triggered?

Do not assume that flood, earthquake, machinery breakdown or stock spoilage is covered simply because you have fire insurance. Ask about each risk separately. Protection depends on the actual policy, not on a salesperson's general assurances.

3. Establish who is protected and who pays

The franchisor may require its name to be included on the policy. The landlord or bank may impose a similar condition. Ask the insurer to explain exactly what rights each named party has: liability protection, entitlement to receive a claims payment, or simply notification if the policy changes?

Also check the excess or deductible — the portion of a claim you must pay yourself. Allow for this in your risk planning, in addition to the annual premium. Ask whether there is a separate limit for each incident, an overall annual limit or a lower limit for particular types of loss or damage.

It is important to compare the insurance cover with any contractual clause requiring you to compensate the franchisor for losses. The insurer will not necessarily cover every liability you voluntarily accept under the agreement. If your contractual obligations extend beyond the policy's cover, identify and discuss that gap before signing.

4. Plan the costs and procedures before buying

Obtain a realistic premium estimate based on the location, equipment, stock and type of operation. Do not rely solely on the figure included in a general start-up investment estimate. Clarify who will pay any additional premium if the franchisor requires a higher level of cover.

Before deciding, make sure the following points are recorded in writing:

• when cover must begin;
• who will renew the policy and submit proof of cover;
• who will report incidents and submit claims;
• who will meet costs while waiting for a claims payment;
• how any payment will be divided if several parties are entitled to it.

Practical reminder: Before signing, compare your contractual obligations, the policy's cover and your own ability to meet uninsured costs. Cheap insurance is not enough if it protects against the wrong risks.