Insurance before franchising: allocate risks before launch

When you turn an existing business into a franchise operation, you need to review its insurance cover. Cover that works for your own units does not automatically extend to independent franchisees’ businesses. Allocating risks, setting insurance requirements and agreeing claims procedures before the first franchise unit opens reduces the risk of costly gaps across your franchise network.

Identify what could be damaged and who bears the risk

Start with the business, not the insurance products. Follow a typical customer transaction from order to delivery and ask what happens if something goes wrong. A personal injury, water damage to premises or an outage in a shared booking system could affect several businesses at once.

Franchising relies on cooperation between independent parties. Do not assume that the franchisor’s insurance covers a franchisee simply because they use the same brand. Check which legal entities, activities and locations each policy actually covers.

Create a simple risk register with four questions for each event:

• Which business could face costs or claims?
• Who owns the property or is responsible for the service affected?
• What insurance cover needs to be investigated?
• Who should take action when the event occurs?

Pay particular attention to equipment that the franchisor owns but places at a franchisee’s premises. Ownership, responsibility for maintenance and the obligation to insure the equipment do not necessarily sit with the same party. These distinctions must be clear before anything is damaged.

Check existing policies against your new role

Ask an insurer or insurance broker to review how your operations will change when your business starts licensing its concept to other businesses. Describe what you will actually do: provide training or systems, sell products, give advice or own equipment used by others.

A policy designed for your own shop or service business may not be suitable for these activities. Ask for written confirmation of the scope of cover, exclusions and any amendments needed. Also ask whether it covers liabilities you assume under the franchise agreement: a contractual commitment is not the same as insurance cover.

For the franchisee’s business, property, liability, business interruption and legal expenses insurance may need to be assessed, for example. Reliance on digital systems may warrant a separate review of cover for IT incidents. This is not a universal shopping list: the need depends on the business and the policy terms.

Work through a specific scenario with your adviser. If a unit cannot open following damage, which costs will continue? Does the business interruption cover apply to that particular cause of damage? How will the waiting period, excess and indemnity period affect the business’s ability to pay its bills? Also check how the agreement treats ongoing franchise fees during a shutdown, without assuming that insurance will cover them.

Set clear and proportionate insurance requirements

Sweden has no comprehensive legislation specifically governing franchising. However, the Act (2006:484) on Franchisors’ Disclosure Obligations applies. It requires franchisors to provide clear, comprehensible written information about the agreement’s implications and relevant circumstances, including financial terms, well before the agreement is entered into. General legislation, such as the Swedish Contracts Act, also applies to the relationship.

Mandatory insurance requirements that involve costs should therefore be clearly set out in the information provided to prospective franchisees to help them make their decision. Distinguish between requirements imposed by law for the business concerned and those you impose through the franchise agreement. The disclosure legislation does not, in itself, impose a general requirement to hold any particular type of business insurance.

Avoid wording that simply says the franchisee must be ‘fully insured’. Instead, specify which risks must be covered, how appropriate sums insured and limits of indemnity should be determined, and what evidence must be provided. Ask a specialist to help tailor the requirements to the franchise concept.

Also agree:

• when cover must start, including during preparations for opening,
• how valid insurance cover must be evidenced and monitored,
• how changes or termination of cover must be notified,
• how shortcomings must be remedied and what contractual consequences may apply.

If you are considering a shared insurance arrangement, clarify each business’s position. In particular, check whether limits of indemnity are shared and how a claim involving one participant could affect the others.

Agree claims procedures before you need them

A practical claims procedure should help the parties act without first having to discuss who should call whom. Set out how to contact insurers, identify the people responsible at each business and name a deputy if the main contact is unavailable.

Describe how to document the incident, limit further damage and decide who will inform affected customers. Follow the policy requirements for notifying claims and check which actions need approval before costs are incurred.

Test the procedure with a tabletop exercise before the first unit opens. For example, use a water damage scenario that destroys both the franchisee’s stock and equipment lent by the franchisor. Check that responsibilities, insurance arrangements and contact procedures can be understood without verbal explanations from the founder.

Practical takeaway: Map the risks, obtain confirmation of insurance cover and rehearse claims procedures before your first franchisee opens. A shared brand is no substitute for clear protection for each business.