Franchises are businesses that have many moving parts. Therefore, it’s critical to understand each component of a franchise, including who the franchisor and franchisees are.
What Is A Franchisee?
A franchisee is an individual who pays fees to a franchise owner or “franchisor” in order to operate said company and use its trademarked name. These fees typically include royalties and upfront payments and amount to between $20,000 and $50,000, according to the Small Business Administration.
A franchisee’s primary responsibilities include maintaining the brand’s reputation, hiring and training employees, and finding locations to conduct routine business operations. Franchisees should also be prepared to follow a franchisor’s rules, such as protocols for customer service or regulations about what type of attire employees must wear.
Are Franchisees Required To Carry Business Insurance?
The answer to this question is not as simple as “yes” or “no” because commercial insurance requirements vary by state. However, one type of business insurance is required in nearly every state: workers’ compensation. This protects you in the event that an employee becomes injured or falls ill on the job.
Every state has different laws regarding who exactly is covered by such a policy, so be sure to look up these laws. General liability insurance is also a key coverage that many states and franchisors require. This covers you after a client is injured on your franchise’s premises (e.g. slipping and falling at the entrance to your building).
Franchise Agreements
Most franchisors often choose to require their franchisees to sign a franchise agreement. This is a legally binding contract that explains the former party’s terms and conditions for the franchise. Once the Federal Trade Commission (FTC) has established that a business can be considered a “franchise,” an agreement can be created.
In this document, franchisors may establish the minimum level of insurance coverage franchisees must have before and during the franchise agreement. They may also specify whether the insurance policies are “claims-based” or “occurrence-based” and what the consequences for noncompliance are.
It’s important to note that if you’re a franchisee for a business in a high-risk industry like construction, claims related to injuries and property damage can cost you up to several hundred thousands or millions of dollars.
Given the growing occurrence of cyberattacks such as data breaches, phishing attacks, and distributed denial-of-service (DDoS) attacks, a franchisor may also require franchisees to carry cyber liability insurance. The same is true for employment practices liability insurance (EPLI) because lawsuits over employment-related claims such as sexual harassment, discrimination, and wrongful termination have also become common in the United States.
Other Types Of Insurance Franchisees Should Have
Here are other insurance policies you should consider acquiring if you’re a franchisee:
Property Insurance
A commercial property insurance can help any franchise that owns or leases any type of space to conduct business. This type of policy normally protects both your physical structure and its contents. Premiums often vary based on location, your building’s construction type, (e.g. if it’s built with fireproof materials) and the size of your building.
Commercial Auto Liability Insurance
If your franchise owns or borrows vehicles such as cars, vans, and trucks for regular business operations, this coverage is essential. Depending on the insurer and the type of policy, you may have either collision coverage or comprehensive coverage, and your limits and deductibles per passenger may vary.
Liquor Liability Insurance (For Businesses That Sell Alcohol)
If your franchise is a bar or a restaurant that sells alcohol, liquor liability insurance will cover you in the event that an inebriated customer causes any injuries or property damage. Food vendors and catering businesses may also need liquor liability insurance. The cost of such a policy typically depends on your location, coverage limits, and the percentage of your sales that is alcohol-related.
Retail Insurance
As a retail franchise owner, it’s a wise decision to obtain retail insurance coverage. Doing so not only fulfills contractual obligations set forth by the franchisor but also protects your business. Retail insurance generally covers property damage, theft, general liability, and business interruption, which are critical in safeguarding your franchise’s physical assets and financial health. Liability coverage included in retail insurance isn’t always mandatory, but it’s vital as it protects against claims of bodily injury or property damage caused to others by your business.
Opting for comprehensive retail insurance ensures that your franchise remains operational and financially stable during disasters or legal challenges. It also demonstrates a proactive approach to risk management, which is often viewed favorably by investors and partners, reinforcing your franchise’s reputation as a reliable and well-managed enterprise.
Speak To The Franchise Insurance Experts
Reach out to the professionals at John M. Glover for more information on the types of insurance franchisees should carry. Since 1916, we’ve been dedicated to providing high-quality insurance solutions to clients throughout Connecticut, New Jersey, New York, Hawaii, and Massachusetts. As an independent agency, we work with many well-established insurance firms.
If you own any type of franchise, (restaurant, hotel, movie theater, etc.) you can benefit significantly from purchasing insurance. At JMG, we understand the various risks associated with starting a franchise and are committed to ensuring both franchisors and franchisees remain compliant with franchise disclosure document (FDD) regulations and other laws.
Our insurance policies include coverages such as general liability, business interruption, equipment breakdown, commercial auto liability, excess liability, property damage, and workers’ comp. Call JMG Insurance Corp today or visit us online to learn more about franchise insurance.
