Franchise insurance: what to check before buying

Water damage to your premises, injury to a customer or a fire can bring trading to a halt, even while bills remain payable. In a franchise network, head office arranges some of the protection, but this does not automatically mean every franchisee is covered. Before buying a franchise, establish who is insured, which risks the policy covers and which losses you would have to bear yourself. Treat this as a separate part of assessing the cost of joining the network.

1. Distinguish legal obligations from network requirements

In Poland, a franchise agreement is an ‘unnamed contract’: there is no separate statute comprehensively regulating franchising. The relationship is governed primarily by the general provisions of the Polish Civil Code, including freedom of contract and liability for failure to fulfil contractual obligations. Depending on the business, competition, intellectual property and tax law, among other rules, may also apply.

Joining a franchise network does not, in itself, create a general statutory obligation to hold business liability insurance. However, insurance may be compulsory under specific rules governing the activity you carry out. Separately, the franchise agreement or lease may require it.

A contractual requirement and a statutory obligation are two different things. Ask the franchisor to specify the types of insurance required, minimum cover limits, scope of cover and deadlines for submitting documents. Also check the consequences of a gap in cover. Do not assume that any policy labelled ‘business insurance’ will be sufficient.

The insurance contract itself is governed by the Polish Civil Code. However, the actual scope of cover also depends on the policy, general insurance terms and conditions, and agreed clauses, subject to mandatory legal provisions.

2. Check who head office’s policy actually protects

An assurance that ‘the network is insured’ does not tell you whether your business will be protected. The policyholder enters into the contract with the insurer, while the insured is the person or business covered. They are not always the same.

Before signing the agreement, ask for documents that establish:

• whether your business will be named as an insured party or fall within a clearly defined group of insured parties;
• whether the cover extends to your specific premises and all activities carried out there;
• whether it covers the franchisee’s liability or only the franchisor’s;
• who submits a claim and who is entitled to payment;
• whether the limit applies to each outlet individually or is shared across several outlets.

A shared limit may be reduced by claims arising at other outlets. Ask how you will be kept informed about how much of it has been used, and whether additional cover is available.

If head office arranges the insurance and passes the cost on to you, establish how those charges are calculated and paid. You also need confirmation of when cover begins: the date you sign the franchise agreement is not necessarily the date the insurer starts providing cover.

3. Match the cover to the losses you could face

Do not start by comparing premiums. First, list the situations that could result in the greatest expense. A food outlet will face different risks from a service business, even though both operate within franchise networks.

Distinguish three areas. Property insurance covers specified assets and events. Business liability insurance may cover liability for harm caused to others. Business interruption insurance may compensate for the financial consequences of a shutdown specified in the contract, often only where insured physical damage has occurred. None of these types of cover automatically replaces the others.

Pay particular attention to property belonging to others. Equipment owned by head office, hired machinery or stock entrusted to you may require a suitable extension to the cover. Simply being on the insured premises is not enough.

Compare your obligations under the franchise agreement with the policy exclusions. Liability you assume contractually beyond what the law would otherwise impose may not be covered by liability insurance. Similarly, do not assume that contractual penalties, stock shortages, equipment breakdowns or losses caused by supply disruptions are covered. Each requires a separate check of the policy terms.

4. Calculate the costs you will still have to bear

The annual premium is only part of the budget. An excess means you bear part of the loss yourself. Sub-limits cap payments for particular events, even where the overall sum insured appears sufficient. If you are underinsured, how compensation is calculated will depend on the contract terms.

Ask your insurance intermediary to work through an example claim: water damage destroys equipment and forces the outlet to close. Ask them to explain which losses would be covered, which restrictions would apply and what documents would be needed.

Separately, check whether you must continue paying rent, franchise fees and wages during a shutdown. An insurance policy does not suspend those obligations. Even if a claim is accepted, you will need funds to cover the period before payment arrives.

5. Agree the procedures before opening

Set out in the documents governing your franchise relationship who renews the policy, pays the premium and provides evidence of continuous cover. If the network requires a particular insurer, ask whether you can submit an equivalent alternative quote and how it would be approved.

Also put the claims procedure in writing: who to notify, who makes the property safe and protects it from further damage, and who contacts the insurer. The network’s procedure should not make it harder to meet the deadlines and obligations in the policy. Check the requirements for premises security, inspections and records documenting the value of your assets.

Practical takeaway: before buying a franchise, put the network’s requirements, the policy cover and uninsured losses side by side on a single page. Only then compare premiums and decide how much financial reserve you need.