Buying a franchise: check insurance requirements before signing

When you buy a franchise, you join a network, but you run your own independent business. You therefore need to know which risks your business must insure against and what any group insurance arranged by the franchisor actually covers. Review the insurance requirements before signing: a requirement that looks straightforward in the agreement may prove expensive or difficult to meet in practice.

1. Find out who and what is insured

Start by requesting the insurance provisions in the franchise agreement and any appendices describing group arrangements. Being told that “the network is insured” is not enough. You need to identify the cover for your business, not just the franchisor’s.

Ask for written answers to the following questions:

• Must you take out your own insurance, or will you be covered under a group policy?
• Is your business the policyholder, a co-insured party or not covered at all?
• Which business activities, sales channels and premises are covered?
• Who pays the premium, and who is responsible for the excess?
• Who reports claims and deals with the insurer?

If the franchisor arranges the insurance, ask for the current policy schedule and relevant policy wording. Have an insurance adviser check how your business is covered. A certificate confirming that insurance exists does not, on its own, establish which exclusions or limits apply.

Check the start date too. Stock, equipment or refurbishment work may expose you to risks before the business opens. Do not assume that cover starts when you sign the franchise agreement.

2. Compare the contractual requirements with an actual insurance quotation

Send the draft agreement and a clear description of your business activities to an insurer or insurance broker. Ask for a quotation and a written assessment of whether the proposed cover meets the franchise agreement’s requirements. Do this before committing to maintain a particular level of insurance.

The agreement may, for example, require specific types of insurance, sums insured or approval of the insurer. Check that the requirements can be met for your particular business and that you have allowed for the cost in your financial projections.

Common areas to discuss include property, liability and business interruption. The cover you need depends on what the business actually does. A business selling products will not necessarily face the same risks as one providing treatments or working at customers’ premises.

Pay particular attention to the distinction between liability under the franchise agreement and liability covered by the insurance. Promising to compensate someone does not automatically mean that the insurer will pay. Ask your adviser to highlight any gaps rather than assuming that standard liability cover will address everything.

In Sweden, the Act on Franchisors’ Duty to Disclose Information (2006:484) requires clear, comprehensible written information to be provided well before the agreement is signed, including information on financial terms. Onerous insurance requirements should therefore be highlighted in the pre-contractual information. The Act does not, however, provide any insurance cover in itself. The contractual relationship is also governed by general contract law, including the Swedish Contracts Act.

3. Test the cover against a specific business interruption scenario

Choose a plausible incident and trace its costs through the business. Suppose, for example, that water damage makes the premises unusable. Who is responsible for damaged fixtures and fittings, what happens to the stock, and which expenses continue while the business is unable to operate?

Ask your insurance adviser to explain what must have happened for a business interruption claim to be payable. Business interruption insurance does not automatically cover every situation in which sales stop. Check the policy wording for the events that trigger cover, exclusions and the indemnity period.

In particular, review:

• any waiting period before compensation becomes payable,
• how long compensation can be paid,
• how compensation is calculated,
• which ongoing costs are covered,
• what steps you must take to limit the loss.

Then compare the insurance with the franchise agreement. Must you continue paying fixed fees while the premises are closed? Is temporary fee relief available? You need both the franchisor’s confirmation of your payment obligations and the insurer’s assessment of the cover. Neither is a substitute for the other.

4. Calculate the cost and maintain oversight throughout the agreement

Include the premium in your profit and loss budget and the payment dates in your cash flow forecast. Also carry out a separate stress test for the excess and any costs that may arise before an insurance claim is paid. A low premium is not the whole picture if the excess or exclusions leave you facing substantial expenses.

If insurance is arranged collectively, ask how the cost is allocated and who can change the arrangements. Find out whether policy limits are shared between several businesses and, if so, what that means for your cover.

Also establish how you will be notified if the insurance changes, is not renewed or ends. Your business needs enough time to arrange replacement cover. Ask for the notification procedure and responsibilities to be set out in writing.

Finally, keep a simple summary of the insurance requirements, quotation, confirmed cover, exclusions and claims contact. Update it whenever the business changes.

Practical takeaway: Do not sign until you know what cover the agreement requires, whether you can obtain it and which costs your business will still have to bear. Check the franchise network’s promises against the actual policy wording.