As a member of our firm’s insurance practice group, I am often asked by clients to conduct comprehensive insurance policy analyses to identify gaps in coverage and uninsured risks.   When conducting these analyses for franchise systems I also typically provide a mark-up of the franchisor’s form franchise agreement with my suggested edits and comments.   I thought I would pass along my list of the top 3 issues I come across when reviewing franchise agreement insurance provisions:

  1. The franchise agreement requires a “Certificate” as evidence of a Franchisor’s Additional Insured Status.  Certificates of Insurance confer NO RIGHTS TO THE HOLDER.  It says so right across the top of the Certificate.  It is useless for this purpose.  You must always receive an endorsement to the policy clearly showing the franchisor as an additional insured and your franchise agreement should require as much.   Otherwise, a franchisor can wind up without coverage under its franchisees’ policies.
  2. The franchise agreement does not provide enough flexibility to change coverage requirements.  Franchise agreements should always provide that coverage requirements can be increased or decreased upon the franchisor’s prior notice as set forth in the Operations Manual or other writing.briefcase  Surprisingly, many franchise agreements outline detailed requirements and coverage limits but do not specifically provide that the franchisor can change these standards as it deems necessary during the franchise term.
  3.  The franchise agreement only requires the franchisee maintain insurance during the term of the franchise agreement.   Professional liability policies and certain other policies are typically “claims made” – not “occurrence” based.  To protect against claims brought after the franchise agreement terminates or expires under claims made policies, the franchise agreement should require the franchise maintain insurance during the term and for such period after as necessary to provide coverage required for events occurring during the term of the franchise agreement.

Another big issue I encounter is lack of compliance by franchisees and a failure for franchisors to pick up on it.  Many times a franchisee’s policy will exclude coverage require by a franchise agreement or have much lower limits than required.  This is true even when a franchise system has a recommended broker or vendor who custom builds a coverage package for franchisees to purchase.  Franchise systems should always have someone who understands insurance policies review both the system’s coverage and each of the franchisees.