The possibility that a franchisor could be pulled into a claim or lawsuit originating from a franchisee’s location continues to grow and evolve. This vicarious liability exposure is an increasing risk that franchisors need to know about and manage.

From an insurance standpoint, we’re frequently asked for the best practices on how to mitigate and reduce this exposure. While there isn’t one magic elixir to eliminate a franchisor’s potential vicarious liability exposure, there are some steps every franchise system should take to reduce this risk.

  • Start with properly written insurance requirements in the franchise disclosure document (FDD).
  • Manage system-wide compliance on FDD requirements. Maintaining franchisee compliance with the correct insurance requirements is increasingly important in protecting the brand and reducing potential exposure.

The challenges for many franchisors are determining what insurance requirements they need and, once they are written, effectively enforcing them. Obviously there’s nothing to enforce until your franchisee insurance requirements are drafted.

Five tips for Developing Requirements

  1. Have your FDD insurance requirements reviewed by an insurance broker who knows and understands the franchise industry. Too often I see FDD language that is boilerplate, vague, incorrect, or all of the above. The boilerplate language does not address your specific risks.
  2. Tailor the insurance requirements around the products and services your franchisees deliver and sell, not what you do as the franchisor. Are your franchisees working in homes, driving cars, working in a restaurant or handling client data? The insurance requirements need to be specific to those products and services performed and delivered by your franchisees.
  3. General liability insurance does not cover everything. Contrary to its name, your general liability (GL) policy has limitations. GL primarily covers bodily injury and property damage and can include coverage for personal/advertising injury and products and completed operations. It does NOT cover harassment, discrimination, wrongful termination claims, data privacy issues, third-party crime against clients, professional liability for services performed and many other scenarios. Too many franchise owners miss this point and don’t understand until they have filed a claim that they are not adequately covered under a standard GL policy.
  4. Additional insured (AI) status is important and should be tracked. This is the first and best step franchisors can take to limit their vicarious liability exposure. AI status is often the first thing that gets overlooked as franchisees’ policies renew each year. To have coverage extended to the franchisor under the terms of a franchisee’s policy, the franchisor must be listed as an additional insured or you can end up paying out-of-pocket.
  5. Collect franchisees’ certificates of insurance (COI): It’s a thankless job but one that needs to be done. A system should be put in place to collect COIs today and each year upon renewal. You can’t manage this process without collecting certificates.

While not as exciting as a new advertising strategy or product roll-out, a well-designed and managed insurance program is extremely important in helping you reduce risks to you and your franchise system. Reducing potential vicarious liability exposure, providing proper guidance, and maintaining consistent brand standards will enable you and your franchisees to focus on growing your business. And that, after all, is exciting.


Doug Imholte is a Franchise Risk Management Practice Leader at Marsh & McLennan Agency in Minneapolis. Contact him to learn more about insurance for franchisors.