Buying a Franchise in Saudi Arabia: How to Review Insurance Requirements

Insurance requirements may look like a minor detail in a franchise agreement, but they can become an unexpected cost or an obstacle to opening your outlet. When entering the Saudi franchise market, asking about the premium is not enough. More importantly, you need to know what must be insured, who benefits from the cover and what you will have to pay yourself if an incident occurs. This review should begin before you sign, not when you are asked to provide an insurance certificate ahead of opening.

1. Distinguish legal requirements from contractual conditions

Franchising in Saudi Arabia is governed by the Commercial Franchise Law and its Implementing Regulations. The law applies to franchise agreements carried out within the Kingdom. Article 11 requires the agreement to be written in Arabic and signed by both parties, or accompanied by a certified Arabic translation if drafted in another language. It must also contain specified details, including a description of the business, the fees and other payments, and each party’s obligations.

However, do not assume that every type of insurance the franchisor requests is required under the Commercial Franchise Law. A requirement may arise from the brand’s standards, the premises lease, a lender’s conditions, or legal requirements relating to the business activity or its employees. Ask for the source of each requirement to be identified, then verify any legal requirements with the relevant authority or a qualified adviser.

Create a list with three columns: the type of insurance, the party requiring it and the document setting out the requirement. This helps you avoid buying unnecessarily overlapping cover or assuming that the landlord’s buildings insurance automatically covers your outlet’s fit-out, stock and liabilities.

Under Article 7 of the law, you must receive the disclosure document at least 14 days before signing the agreement or making any payment relating to the franchise, whichever comes first. Use this review period to request the insurance requirements in writing and obtain actual quotations, rather than relying on a verbal estimate.

2. Turn general wording into specifications insurers can price

A statement such as ‘the franchisee must maintain appropriate insurance’ is not enough to build a budget or assess whether you are meeting your contractual obligations. Ask for a schedule specifying the types of cover, their limits and duration, and whether cover must begin during the fit-out or when trading starts. The risks involved in installing equipment differ from those that arise once customers are on the premises.

Depending on the nature of the business, consider whether you need cover for property, equipment, stock, third-party liability and business interruption. These are areas to review, not a standard mandatory list for every franchise. The services or products you offer may also call for a discussion of other types of cover with an insurance specialist.

For each required type of cover, ask for clear answers to the following:

• Does the limit apply per incident or in aggregate over the policy period?
• What excess must you pay before the insurer contributes?
• Are there sub-limits for particular risks or property?
• Does the equipment valuation include replacement and installation costs?
• Does the franchisor require a particular insurer or approval of the policy?

Send the same specifications to everyone you approach for a quotation. Comparing premiums without aligning cover limits, excesses and exclusions can create the misleading impression that the cheapest quotation is the most suitable.

3. Test the policy against a realistic incident, not just the name of the cover

With your adviser, choose a scenario relevant to your business: a water leak that damages equipment and halts trading, for example, or an incident that injures a customer inside the outlet. Trace the loss step by step: repairing the damaged asset, dealing with the damage, continuing rent payments, staff wages and potential third-party claims.

Then ask which elements the policy covers and which remain your responsibility. Do not assume that ‘business interruption’ means compensation for every fall in revenue. Check the causes of interruption covered, the conditions for a claim to qualify, the waiting period, the indemnity period and how losses would be calculated under the proposed policy.

Also note the distinction between an excess and an excluded risk. An excess is your contribution towards a covered claim under the policy’s terms; an exclusion may leave the loss outside the scope of cover altogether. Ask for a written explanation of unclear clauses rather than relying on a brief marketing description.

Read the insurance clause alongside the liability and indemnity clauses in the franchise agreement. You may be taking on contractual obligations beyond what the insurer is willing to cover. Having a policy does not mean that every payment the franchisor might demand from you is insured. Your lawyer and insurance specialist should identify any gap before you accept it.

4. Clarify who benefits, renewal arrangements and proof of compliance

If the franchisor asks to be named in the policy, clarify exactly what status is required and what it means. Must the franchisor be named as an additional insured, or is the intention to give it rights over claim payments for specified property? Do not treat these arrangements as interchangeable. Ask the insurer to confirm that the required wording is available and explain its effect on your rights and its cost.

Also establish who submits a claim, who receives the payment and how it will be used to repair the outlet. Check the deadline for providing evidence of cover, who is responsible for tracking renewals and how the franchisor must be notified of any changes. Do not accept a procedural obligation until you have confirmed that both you and the insurer can fulfil it.

Include premiums, excesses and uninsured losses in your financial assessment, and ask what limits apply to the franchisor’s right to increase insurance requirements later. If cover meeting the specifications cannot be obtained, request a written amendment before signing.

Practical takeaway: Do not sign until you have three documents that align: clear contractual insurance requirements, a quotation for cover that can actually be put in place, and a list of the risks you will have to bear yourself.