This final post in our four part series covering insurance issues, which arose out of the ABA webinar “Practical Insurance Guidance for Franchisors,” turns from focusing on franchisee coverage issues to focusing on the franchisor’s coverage. More specifically, this post focuses on a franchisor’s E&O coverage and some practical pointers related to such coverage.
First, if a franchisor is contemplating coverage to insure against alleged errors, omissions or negligence in performing its professional services to its franchisees, then it should insist on the broadest definition of “professional services” in the policy. Common accusations against a franchise system include territory issues like alleged failure to manage exclusive territories, inadequate support when choosing a location or a general lack of support at the levels promised by the franchise agreement and franchise disclosure document. Good E&O coverage for franchisor services should cover the preparation, amendment, renewal or registration of the FDD; the marketing, sale, renewal or termination of a franchise agreement; training; site selection; negotiation or approval of leases; and development or monitoring of compliance standards.
Second, like cyber policies discussed in a previous post, E&O policies are “claims made” policies. As such, defense costs and expenses are included within – and are not in addition to – the policy limit. These costs can erode the policy limit very quickly so make sure to scrutinize coverage amounts carefully. As most attorneys know, it is not unusual for the cost to defend a lawsuit to far exceed the damage award. Additionally, make sure to negotiate the “retroactive date” as far back as possible to avoid a denial of coverage based on the Retroactive Date exclusion.
Finally, there are some policies that will provide coverage for vicarious liability or losses arising out of the actions of a franchisee. While such coverage may be subject to a sub-limit, it may be worth investigating if protection from vicarious liability is a concern.
As with my previous posts, I end with the reminder that a reputable knowledgeable insurance broker and counsel can be a franchisor’s best way to find the right coverage.