Learn how you, as a franchisee, can safeguard various components of your franchise business to mitigate potential financial losses.
Franchise Insurance – A Need, Not a Luxury
Every business needs an insurance cover that they can fall back on when things go wrong in a particular direction. Franchise businesses aren’t any different in this regard. If you have purchased a new franchise, you must act to put proper insurance agreements in place before you start trading.
In our free franchise resource guides, we have discussed what franchising is, how it works and how you can choose and buy a franchise in the UK. But what constitutes franchise insurance? Who pays for it? How much of a cover are you really going to need? How will the costs of franchise insurance affect your business?
We will try to answer these and many more questions in this article.
What is Franchise Insurance?
There exists no certain definition of the term ‘franchise insurance’. Considered in its broadest form, franchise insurance encompasses all the insurance covers that protect the franchisee as well as the franchisor in a variety of unfortunate events.
In many businesses, the norm is to divide franchise insurance into two components – the franchisor insurance and the franchisee insurance.
The franchisor insurance, typically limited to the liability of the franchisors outside the scope of the Franchise Agreement, is borne wholly by the franchisor. The franchisee insurance, on the other hand, is more robust as it has to provide a cover for on-site activities, personnel, customers, products, services and so forth.
Who Pays for the Franchisee Insurance?
Many franchisors offer a nominal insurance cover for all their franchisees. This cover, in most cases, comes nowhere close to addressing the actual needs of the franchisees. Therefore, it’s safe to say that you, as a franchisee, will have to invest more to buy various franchisee insurance packages.
Many franchisees fail to take the insurance components into account while drafting the business plan – an error that can have significant consequences on the eventual profitability. So, the best plan of action for you is to know beforehand what the insurance costs are going to be and how you are going to spread them evenly across the year.
Why Does a Franchise Business Need Insurance?
Having an insurance cover protecting your business from certain events is not a luxury anymore – it’s one of the most basic necessities of life in this day and age. When you know that just one bad day can potentially nullify the profits of the whole year and then some, it makes all the more sense to have your business insured.
This answers the question why franchisees and franchise businesses need insurance. The confusion, however, remains about the scope and depth of the insurance cover.
The cover your franchise business will need will strictly depend upon the type of business you run, the risks involved and the place of operation. A franchise business prone to obvious safety hazards (think restaurant franchises) will typically require a wider insurance cover than a home-based business (think administration franchises).
If you are new to franchising, you may also want to see your franchise business in a more personal light. Many franchisees are given to thinking that the bulk of the professional liability lies with the franchisor. This, while true in many cases, isn’t a reasonable way to operate a business. Despite knowing that you never really ‘own’ the franchise, it’s important to always remember that you are still running your own business when you run a franchise. Thus, the professional, personal and entrepreneurial responsibilities that come with it will always be your own. This approach will help cement the idea that all franchisees do need a reliable insurance cover to rely on.
Having discussed what franchise insurance is and its importance for franchisees, let’s now move on to the various components that make up the body of such insurance covers. These variants can, depending on individual cases, be clubbed together as group insurance packages.
Employer’s Liability Insurance (EL) for Franchisees
All franchisees should consider having an Employer’s Liability Insurance cover to protect their employees. If your franchise business is classified as a motor trade business, this becomes a non-negotiable legal requirement.
An Employer’s Liability Insurance helps you pay for the medical and personal expenses that your employees may be forced to bear due directly to the work they do for you. Not having an adequate Employer’s Liability Insurance can lead to you having to pay hefty fines, and even see your business asked to stop trading. Many insurers include the group insurance policies for life and health for the employees in the EL Insurance quotation.
Professional Indemnity Insurance (PI) for Franchisees
Professional Indemnity Insurance is one of the most important insurance components for service-oriented businesses. If your franchise business provides professional services, you may want to insure them against failure despite maintaining good faith. In most cases, the franchisor will extend the cover of their master PI Insurance policy to all individual franchisees. It still, however, makes a lot of sense to expand this cover for your franchise by paying a reasonably small premium amount each year.
Professional Indemnity Insurance helps you deal with the awards as well as the legal expenses incurred in an event of professional failure.
Public Liability Insurance (PL) for Franchisees
Just like your employees, your customers can – in theory – experience injuries in your store. Furthermore, there may come up the odd case of a customer having to spend money as medical expenses due directly to the use of the product they bought from you. You can insure your business against such risks with the help of Public Liability Insurance (PL).
In some regions, the product related component of a PL Insurance package is dealt with separately as ‘Product Liability Insurance’.
Asset Insurance for Franchisees
Despite not being mandatory, Asset Insurance is the most commonly opted for insurance framework for UK businesses.
If your franchise business owns expensive assets, you may want to have them insured against common risks like theft and damages. This includes bringing the business premise, furniture, vehicles, equipment, software, inventory and other significant assets under the aegis of the Asset Insurance policy.
Seek Expert Advice
It is customary for franchisors to provide certain insurance covers as a part of the Franchise Agreement. These covers are, in most instances, combined in a Master Policy. Therefore, before you buy any insurance policy for your franchise, it’s important to seek an expert’s professional advice to know and understand what such a policy brings to the table. This will help you avoid redundancies and cut down on premium costs.
Striking a reasonable balance between the costs and the potential benefits of insurance is the key to making the most of franchise insurance policies.