Buying a US Franchise: Check Insurance Requirements

Insurance can look like a routine purchase until a franchise agreement demands cover that is expensive, difficult to obtain or narrower than you expected. Before joining a US franchise community, establish what insurance the brand requires, what your business actually needs and who bears losses that a policy will not pay. Treat this as a pre-signing check, not an opening-week task.

1. Find every insurance obligation

Ask for the insurance requirements in the franchise agreement, its schedules and any relevant operating manual provisions. If you will occupy premises, obtain the landlord’s requirements too. A lease and a franchise agreement can impose different obligations on the same business.

Build a checklist covering:

• Required policy types and minimum limits.
• Maximum permitted deductibles or self-insured amounts.
• Insurer eligibility requirements.
• Parties that must be named as additional insureds.
• Evidence of cover and renewal deadlines.
• When cover must begin, including before opening.
• The franchisor’s ability to change requirements during the agreement.

Ask whether insurance must be purchased through a nominated broker or programme, or whether you can arrange equivalent cover independently. Establish who decides whether an alternative policy is acceptable and how approval is documented.

Do not assume a franchisor’s own insurance protects your business. Ask explicitly which risks, if any, a group arrangement covers for franchisees and obtain the relevant policy documentation.

2. Use US disclosure rules to investigate the cost

The Federal Trade Commission’s Franchise Rule, 16 CFR Part 436, requires covered franchise sellers to provide a Franchise Disclosure Document (FDD). Generally, you must receive it at least 14 calendar days before signing a binding agreement with, or paying money to, the franchisor or its affiliate in connection with the proposed franchise sale.

The FDD contains 23 disclosure items. Item 7 sets out estimated initial investment costs; check how insurance is treated and what period any allowance covers. Read this alongside the actual contractual requirements rather than treating a start-up estimate as a reliable annual premium.

The FTC Rule is a disclosure framework, not a guarantee that the insurance package is adequate or competitively priced. Some states also have franchise registration, disclosure or relationship laws. Separately, insurance obligations such as workers’ compensation requirements depend on applicable state law and the business’s circumstances.

Have a US franchise lawyer identify the relevant state requirements. A licensed insurance professional should assess the cover itself. These are different jobs: contractual compliance does not necessarily mean you are adequately insured.

3. Get quotations for the actual operation

Give an insurance broker the proposed agreement’s insurance provisions and a clear description of your planned business. Include its location, services, staffing, vehicles, equipment and any work carried out at customers’ premises.

Depending on the operation, discuss public-facing liability exposures, commercial property, workers’ compensation, commercial motor, professional liability and cyber cover. These are examples to assess, not a universal shopping list.

Request a written comparison between each quotation and the franchise requirements. Ask the broker to flag exclusions, limits and endorsements that could leave a contractual obligation unmet.

Pay particular attention to:

• Activities the policy excludes despite being part of the franchise offering.
• Whether defence costs reduce the amount available to settle claims.
• Separate limits or deductibles for particular risks.
• Restrictions affecting flood, wind or other location-specific hazards.
• Conditions attached to business interruption cover.

Business interruption insurance does not compensate for every trading setback. Ask which events trigger payment, whether a waiting period applies and how long payments can continue. Do not assume it covers weak sales, every utility failure or closure following any incident.

4. Identify what remains your responsibility

Ask your lawyer to compare insurance provisions with indemnities: contractual promises to reimburse another party for specified losses. A broad indemnity may expose you to liabilities that your insurer will not cover. Naming the franchisor as an additional insured does not automatically solve that mismatch.

Check what happens if cover lapses or the franchisor rejects your policy. Can the franchisor purchase replacement cover at your expense? Does a failure constitute contractual default, and is there an opportunity to correct it? Establish the process before you commit.

Finally, budget for premiums, deductibles and uninsured losses separately. Test whether you could fund a substantial deductible while trading is interrupted. Ask how changes in staffing, turnover or activities could affect premiums, and when you must notify the insurer.

Practical takeaway: Before signing, obtain a requirements checklist, a quotation checked against it and a written explanation of significant uninsured exposures. Proceed only when you understand both the cover you are buying and the risks you will still carry.