When opening a business as a franchisee you will want to ensure that you are adequately insured. Proper insurance allows you to recover from a financial loss during the occurrence of a specific event. Such event might consist of an employee or customer being injured at the business premises, business interruption due to fire or flood, theft or employee fraud. Each of these events can cause the franchisee to have a loss of income as well as the franchisor incur a loss of royalties.
As you will be making tenant improvements and stocking inventory prior to opening your business, you will want to have insurance coverage commence immediately upon taking procession of the premises.
Typically in a franchise agreement, or within the Operation Manual, there will be specific insurance requirements that you are obligated to get from insurance providers. Typical insurance requirements include;
- Comprehensive public liability insurance- liability imposed by law due to bodily injury and property damage both on and away from the premises
- Product Liability Insurance- for physical loss or damage to inventory
- Property Damage Insurance- for property damage due to fire, flood, smoke, vandalism, etc.
- Business interruption insurance – for financial loss from closing of the business due to damage or destruction of property
- Employment Practices Insurance- coverage arriving from such claims as discrimination, wrongful dismissal or harassment
- Workers Safety Insurance- coverage for employees at the workplace
- Auto Insurance - coverage for delivery vehicles, etc.
The franchise agreement will normally require the franchisee to add the franchisor has an additionally insured third party to the insurance policy and provide a copy of the insurance certificate for the franchisors records. These requirements are in place to protect the system as a whole and to protect you. This typically does not cost any more to the franchisee and allows the franchisor to claim from the insurance company any lost royalty payments or to protect themselves against laws suites that may arise against the franchisor, through no fault of their own, as a result of such things as personal injury. The franchisee is required to indemnify the franchisor from all fines, suits, claims or actions of any nature related to the operation of the franchisee’s operation of the business. Without adding the franchisor you would be assuming the financial risk, which defeats the purpose of the insurance. It allows the franchisor to operate efficiently and not have all its financial resources potentially being spent on issues that are at an individual franchisee location level.
Costs of insurance will vary depending upon numerous factors including, but not limited to, the geographical area, type of business, deductable amounts and the dollar amount of the coverage. Franchisors that have reached a certain size will often negotiate a group policy with a preferred supplier in order to pass savings on to the franchisee. The franchise agreement will often state that the franchisee may be required to purchase insurance from a preferred supplier. This allows all franchisees to the system to take advantage of the franchises size and buying power.
In addition to the required business insurance, franchisees will want to look at optional insurance packages to further protect themselves and/ or their employees. For example;
- Life Insurance- provided when there is loss of life.
- Disability Insurance- provide replacement of income when permanently disabled no longer permits you to perform your job
- Critical Illness Insurance- provided when you become seriously ill
- Health plan insurance- including medication, dental, prescription drugs
Employees are increasingly expecting and seeking higher standards for medical service and financial security. Group insurance and benefit plans for employees allow employers to be competitive and attract and retain good employees. A group plan is significantly lower in cost compared to individual coverage.
This article is by no means an exhaustive list of the insurance available. Not all coverage will apply to your specific circumstance. Your specific insurance needs will vary depending upon the nature of the business and exposure to potential liabilities. Consult with your franchisor to determine the specific needs required and consultant with an insurance broker. They will be able to assess your specific circumstances and provide advice as to what products are best for you and your business. Be sure to have them fully explain the specific details of the insurance policy the coverage and the restrictions that apply.
Ultimately insurance is planning for worse case scenarios. With insurance in place you can focus your energies on building a successful business and not be worried about financial loss due to hardships that are often outside your control.