This month I attended a very interesting ABA webinar entitled "Practical Insurance Guidance for Franchisors." The panel, which consisted of both franchise lawyers and an experienced insurance broker, provided some excellent practice pointers for anyone who drafts franchise agreements or handles insurance compliance and risk management matters for franchise systems. The webinar provided so much good information for franchise systems that this post will be one of a series of posts on the fascinating topic of franchise system insurance issues. This first post will focus on tips related to "additional insured" (AI) coverage. Not surprisingly, requiring franchisees to add the franchise system as an additional insured is not enough.

Below are a few takeaways.

  1. Make sure you are requesting the broadest "form" of AI endorsement from your franchisees. Talk to your broker and make sure the form used is not limited to vicarious liability. The form you accept should extend to negligence, errors and omissions of the franchisor.
  2. Verify that your form of franchise agreement does not inadvertently limit coverage. Many forms of AI endorsements state that coverage is no broader than what is required in the underlying agreement or contact. Therefore, if your franchise agreement limits a franchisee's obligation to providing AI coverage for only vicarious liability, then the endorsement will not provide broader coverage for negligence, errors or omissions.
  3. Many form of franchise agreements require a certain dollar amount of insurance coverage. For example, a franchise agreement may say that a franchisee must have $1 million in general commercial liability coverage. Many AI endorsements limit coverage to the lesser of (i) the amount required by the agreement or (ii) the policy limits. Make sure your form of franchise agreement speaks to these dollar coverage limits as minimums! This avoids a franchise system from losing AI coverage it may have otherwise had when a franchisee purchases a policy with a limit higher than the requirements set forth in the franchise agreement.
  4. I have mentioned this in previous posts but it is always worth emphasizing again. You must always obtain a copy of the AI endorsement issued by the franchisee's underwriter. A "certificate of insurance" does not confer rights on the holder and a franchisor cannot rely on it in a dispute about coverage.

Remember that the insurance sections in a franchise agreement are not "boilerplate" provisions. How these sections are drafted will very much affect a franchise systems right to coverage. Do not unnecessarily limit your recovery rights by using insurance provisions that are not properly vetted and reviewed by counsel knowledgably in this area of law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.