As a franchise owner, you’re probably well-aware of the many decisions you must make and policies you must uphold to remain in compliance with the typical franchise disclosure document (FDD) or legal agreement you signed and enacted when you purchased your business. While these documents vary in depth and content, one of the key elements all FDDs include is insurance requirements.
The typical business insurance requirement in your FDD will cover your operation from standard claims — including employee injury and the resulting workers’ compensation — to property loss or damage and liability insurance that will protect you and your business from being legally sued or held liable in the case of malpractice, negligence, injury, or even death. But in the very complicated and ever-changing world of franchise insurance, it’s important to understand your policy and ensure you and your business are adequately covered. Even if you’re in compliance with your FDD, you may still be unaware of dangerous gaps in your insurance coverage.
Gaps in your franchise insurance coverage can come in a variety of forms. The most overlooked omissions and gaps occur in these ways:
- Insufficient Coverage — Depending on the insurance plan you have in place for your franchise, the policy may not be enough to cover you, your business, employees, and customers in the event of a major catastrophe, injury, death, or other unforeseen situation.
- Out of Compliance — Despite your best efforts, we often run into franchisees who believe they’re meeting the needs of their insurance requirements per their FDD, but in actuality, their policies are not compliant with the standards set by the agreement.
- Property Coverage — Not all franchise insurance policies cover the property itself, and others many not have sufficient coverage to protect all your businesses property in the event of theft or damage.
- Umbrella Insurance — Umbrella insurance coverage kicks in when you’ve maxed out other forms of insurance. Many franchise owners do not carry this type of policy, but it can protect your business, tools and equipment, property, and more in the case of a catastrophic event that exceeds your standard coverage.
- Employment Practices Liability Insurance (EPLI) — EPLI covers you and your franchise if a current or former employee sues you on the grounds of your business practices violating her or his legal rights. Many franchisees do not carry this kind of insurance, but recently, these types of claims are on the rise and, as such, EPLI coverage may be necessary.
- Workers’ Compensation — Your FDD likely mandates that you hold workers’ comp insurance, an insurance plan that covers employees who have been injured or become disabled on the job with a financial benefit. However, it’s possible your policy is not sufficient to cover your franchise.
- Cyber Liability — In our digital world, it’s important to ensure your franchise is covered in the event of a data breech or loss of personal information. Coverage for such events is available through cyber insurance, but many franchisees don’t carry this type of policy. Depending on your business type, this insurance may be necessary.
- Errors and Omissions (E&O) Liability — If your provide a service rather than a physical product, carrying E&O Insurance may be necessary to protect you and your franchise in the event a customer sues you on grounds your service caused damage or distress. Many FDDs include E&O insurance, but some may not, leaving you and your franchise at risk with an insurance gap.
For example, in recent years, the relationship between franchisee and a franchisor has changed in a way that now makes it standard that a “business franchisee could be considered a ‘joint-employer’ with the franchisor company that lends its brand name and marketing to the small business,” according to Insurance Journal. This is an important change because, despite past precedent, franchisors are now being held liable for claims by employees at franchises with a specific focus on EPLI. This means both the franchisor and franchisee should carry EPLI coverage in the event an employee sues both. These complicated changes have left many business owners in jeopardy with large coverage gaps.
Having gaps such as these or others in your franchise insurance coverage can be a life-changing mistake. Don’t fall into the enormous hole an insurance gap can create! If you were to be sued or sustain a loss of property without the proper insurance coverage, you’d be at a huge risk for loss of business, assets — or worse.
Because of this risk, it’s important to have an insurance professional properly analyze your FDD, your insurance coverage, and your company or franchisor insurance policy to make sure you’re in compliance and that you don’t have any gaps in coverage. Doing so now can save you huge amounts of money and hassle down the road.