Franchise Things

Episode #2Franchise Things:Do you make this mistake with your Franchisee's Insurance?

March 5, 2021

Mike Drumm is joined by Doug and Heath Groves, of Program Insurance Group (www.pigbcs.com), Guardify (www.guardifyig.com), and Easy Cert (www.certmgmt.com). Doug brings more than thirty five years of insurance experience, while Heath is a former restaurant franchisee himself, to their dozen plus years in the franchise insurance industry.

Important timestamps:

3:15 How do you know what you need when it comes to franchise insurance?

14:45 Risk assessment and exposure

20:20 Understanding the Certificate of Liability Insurance

29:22 Listing Additional Insured

42:20 Practical tips for self-monitoring

How do you know what you need when it comes to franchise insurance?

What Kind and how much?

  • The FDD controls the insurance required
  • What are the potential types of claims for your system
    • Delivery, Alcohol, Food Borne Illness, Hiring/Firing Employees, Products, etc.
  • What limits should be required or are necessary to reduce risk
  • How difficult is the business to restart if/when a loss by a franchisee
  • Business interruption

The basics:

  • Franchise insurance is fairly standardized but insurance requirements in the FDD must be specific
  • Projections for claims are based on potential for loss
  • $1M is a standard starting point for liability, auto, worker’s comp, umbrella
  • Obsolete coverages can be removed – insurance is a living, breathing, changing thing

As a franchisor, what are the risks if your franchisee doesn’t do their due diligence on insurance?

  • First and foremost: you can be held responsible for your franchisee’s lack of insurance
  • Your FDD should require you (the franchisor) to be listed in addition to the franchisee – we’ll talk more about that shortly when we get to Additional Insured

So what is business interruption insurance?

  • This is for unforeseen circumstances that force a shutdown of business – a gas leak, a power outage, a water or sewage issue
  • It’s a mechanism to speed up the insurance claims and helps ensure that business interruption does not cause the franchisee to shutter for good
  • Pays on unreimbursed expenses – rent, payroll, moving costs (expense alleviator) – does not replace profit, but pays ongoing expenses
  • Can be included as gross revenue for franchisors – royalties should be written into the FDD under the business interruption insurance section

Risk assessment and exposure

Risk

  • As a system grows it becomes more important – more locations, increased risk exposure
  • Gives you a way to control and evaluate losses
  • As years pass by without monitoring, franchisees can drift away from required coverages
    • Continued daily, weekly, monthly, yearly monitoring of all franchisees year after year
  • Challenges of understanding/reading a Certificate of Insurance
  • Managing sold locations and the transfer of liability to new ownership
  • Insurance typically renews annually and needs to be closely monitored so as not to lapse
  • Easy Cert monitors franchisees’ insurance adherence so that franchisors (especially with a lot of locations) aren’t solely responsible foreach franchisee’s compliance
    • Easy Cert inputs the FDD required language and what the franchisee is actually doing to see whether or not they are compliant, then issues compliance reports
    • Verifies limits, dates, named insured, coverage – and reports to franchisor items that need to be addressed.

Understanding the Certificate of Liability Insurance

  • This is a pretty standard form, but it’s dense and it’s important
  • When deciding on an insurance carrier, what should you know?
    • Insurance companies are rated by their financial strength
    • A+ is good for withstanding risk. Having an A+ rated company is certainly a best practice and it’s a good idea to make this an FDD/FA requirement – as long as they are available
  • Occurrence-based versus claim-based general liability
  • If you take only one thing away today: make sure your insurance effective date is current
  • What is the difference between occurrence and aggregate?
  • The aggregate can be reinstated once you’ve maxed out your claims… for a fee
  • The purchaser of the insurance should match both the listed “insured” (who’s covered under this policy) and who the franchisor has listed as the franchisee
  • Franchisors should send out certificate templates to franchisees for insurance documentation – they’re really long and really necessary

Listing Additional Insured

  • The franchisor should be listed as “additional insured” so that they are protected from a loss at franchisee’s premises. This is something to always double check – insurance agents don’t always know franchisee and FDD requirements
  • Possible supplier entities, affiliates, anyone else listed in the FDD can and should all be listed as additional insured
  • How much does it cost to add additional insured? Look for blanket additional insured policies
    • Blanket allows the addition of additional insured at any time with no additional charge – this is not something automatic; you should look for it

Additional Insured

  • How important the Additional Insured language is:
    • An additional insured extends the liability insurance coverafe beyond the named insured to include other individuals or groups. An additional insured endorsement protects the additional insured under the named insurer’s policy allowing them to file a claim if sued.
  • What happens when a franchisee:
    • Goes out of business
    • Non-payment of premium
    • Has a claim/loss

Additional Named Insured vs Additional Insured

  • Additional Named Insured: the name of the co-owner with the same rights as the insured. An example of this could be an affiliate of the primary insured.
  • Additional Insured: an endorsement that extends policy liability limits to another party by endorsement. They do not have the right to alter the policy, but have the right to be indemnified should a loss occur. For example, if you are insuring a business that is a franchise, most Franchise Agreements stipulate the franchisor must be named as an additional insured via endorsement.

Worth nothing

Why is an occurrence-based policy better than a claims-based one?

  • Statute of limitations – if you get injured you have 1-3 years to report depending on the claim and state
    • This would be considered an “occurrence” as long as it can be proven to have happened during the policy period
    • Covered regardless of when it was reported
    • Claims-based policies are less common than occurrence-based ones

What is a joint employer requirement on franchise documents?

  • Must name franchisor as additional insured (or additional named insured) on all policies except employment practices/liability (EPLI) and workman’s comp policy. Doing so on those can put liability on franchisor

Practical tips for self-monitoring

Setting up a COI Management System

  • List of contact information for all Franchisees
  • FDD Requirements from brand
  • Keep up with the new, old, change of ownership locations
  • Monitor limits for all required coverages
  • What to do with incorrect or missing imits/coverages
  • Keep up with renewal dates of each location, notify locations of upcoming renewals
  • How to handle expired COIs
  • Reports to Franchisor
  • Be attentive to renewal dates
  • You don’t want the uh-oh moment AFTER a loss has occurred. Stay ahead of the deadlines.
  • As a franchisor, what do you do when you find out one of your franchisees is delinquent on insurance?
    • This will depend on what’s in your FDD
    • Do you have a force-placed coverage clause?
  • Auto, liquor, heavy liability items need a harder line – act fast, minimize exposure if there is any doubt about insurance viability
  • Insurance rates are negotiable and there are things a franchisee can use a bargaining chips
  • To minimize errors in insurance tracking and monitoring, a professional tracking system is a preemptive strike. You don’t want to wind up having to pay a bunch of money because your franchisee was noncompliant. Get on top of it before it’s too late
  • Insurance evolves, so make sure your FDD is getting its insurance update periodically

Important timestamps

  • 3:15 How do you know what you need when it comes to franchise insurance?
  • 14:45 Risk assessment and exposure
  • 20:20 Understanding the Certificate of Liability Insurance
  • 29:22 Listing Additional Insured
  • 42:20 Practical tips for self-monitoring