How to Plan Insurance Obligations in a Franchise Agreement

When preparing to franchise your existing business, do not treat insurance as just another document in the opening paperwork. Fire, flooding, customer injuries or business interruption can affect both the franchisee’s finances and confidence across the franchise network. Sound preparation means deciding who will cover each risk, which policies will be required and what to do when a loss occurs—all before the first agreement is signed.

1. Distinguish legal requirements from contractual conditions

Turkey has no specific law exclusively governing franchise agreements. Nor is there a general requirement to register the granting of a franchise on a public register or to provide a mandatory, standard-format pre-contractual disclosure document. However, general legal rules still apply: the absence of specific legislation does not give the parties unlimited freedom of contract.

The Turkish Code of Obligations, Law No. 6098, is relevant to the formation and performance of franchise agreements, while the Turkish Commercial Code, Law No. 6102, is important for commercial relationships and insurance contracts. One of the key foundations of the duty to act in good faith during negotiations is the principle set out in Article 2 of the Turkish Civil Code, Law No. 4721. The Insurance Law, Law No. 5684, also forms part of the regulatory framework for insurance activities.

There is no general franchise regulation requiring every franchised business to have the same insurance package. The business’s activities, vehicles used, property characteristics and any applicable sector-specific rules must be assessed separately. Cover required by a franchisor under an agreement does not become legally compulsory insurance simply because it appears in the contract.

Create two separate columns in your preparation checklist: “Statutory obligations” and “Cover required by the franchise agreement”. For each entry, record its basis, the person responsible and the review date. Verify the list with a legal adviser and an authorised insurance intermediary.

2. Match the existing business’s risks to insurance cover

The first step is not simply to recommend your existing policy to a new franchisee. Two outlets operating under the same brand may differ in building construction, equipment value, stock levels and customer footfall. Use your own business’s risk assessment as a starting point, then examine local conditions at each new outlet separately.

Your assessment table could include the following headings:

• Physical assets: Establish who owns the fit-out, machinery, fixtures and fittings, and stock, and the basis on which their insured values will be calculated.
• Third-party injury and damage: Assess suitable liability cover for bodily injury or property damage suffered by customers or visitors.
• Employee-related risks: Review the scope of employers’ liability cover and make clear that it does not replace occupational health and safety obligations.
• Business interruption: Calculate the financial impact of closure following a loss, and check which events and conditions trigger business interruption cover.
• Activity-specific risks: Consider needs such as product liability, perishable stock or damage to electronic equipment in light of the business model.

For example, in a business selling chilled products, damage to refrigeration equipment and spoilage of the products inside it may not fall under the same cover. The cause of a power cut, any waiting period and exclusions may affect the outcome. Rather than accepting “we have a package policy” as an answer, check how the relevant cover is defined in the policy.

Write a plausible loss scenario for each risk. As well as informing insurance purchasing decisions, this exercise helps identify preventive measures for your franchise model.

3. Establish a workable insurance standard in the agreement

A clause stating that “the franchisee shall insure the business” is too vague to put into practice. The agreement and its insurance schedule should explain the policy types required, how the scope of cover will be determined, when documents must be submitted and who is responsible for maintaining cover. Assess refurbishment, installation and delivery risks that may arise before trading begins separately.

Do not set identical cover limits for every outlet without justification. Develop a method based on asset values, the potential scale of losses and the characteristics of each business. Also examine excesses, sub-limits and exclusions: a seemingly high overall limit does not mean that a particular claim will result in an adequate payment.

Allocate responsibilities clearly. Who will arrange the policy, pay the premium and monitor renewal? How will gaps in cover be addressed? How must expiry or cancellation be notified? The franchisor’s review of insurance documents must not be presented as a guarantee that the insurer will cover a claim.

If the landlord, equipment owner or franchisor needs to be named separately in the policy, confirm with the insurer the capacity in which they will be named and its legal effect. Adding a party’s name to a policy does not automatically cover all their losses.

Also specify how changes to the standard will be communicated and how long franchisees will have to comply. New requirements that affect a franchisee’s costs should not become unexpected obligations imposed without explanation.

4. Test renewal and claims procedures before opening

Insurance preparation does not end when the policy is submitted. Appoint a responsible person at head office and track each outlet’s policy period, summary of cover, renewal date and outstanding gaps. Review not only the first page of the policy but also any endorsements that change the cover.

Prepare a short claims procedure. Protecting life and carrying out any necessary emergency response come first. Then plan how to document the incident, take reasonable steps to prevent further damage, notify the insurer and inform head office. Check notification deadlines against the relevant policy and legislation rather than relying on a single standard timeframe.

Run a sample flooding scenario at your existing business: who calls whom, what records are kept and how are repair decisions made? Explain to the team that informing head office does not replace notifying the insurer. This rehearsal puts shared responsibility across the franchise network into practice.

Practical takeaway: Before signing the first franchise agreement, prepare a risk table, a clear insurance schedule and a one-page claims procedure. Have all three checked by a legal adviser and an authorised insurance intermediary before putting them into use.