In my last post, I outlined some practice pointers and issues to consider when addressing a franchise system's typically universal requirement to add the franchisor as an additional insured under each franchisees' insurance policies. This post expands on the topic by discussing some additional insurance related guidance I obtained from the "Practical Insurance Guidance for Franchisors" ABA webinar.
First, remember that an additional insured endorsement is typically not available for employment practices liability insurance, errors and omissions coverage and cyber insurance coverage. In almost all cases a franchise system won't be successful in obtaining coverage under its franchisees' EPLI, E&O and cyber policies. Therefore, it is critical that a franchise system's operations manual and franchise agreement require its franchisees to implement and have in place fulsome and current risk management policies to decrease the likelihood that a claim will arise requiring coverage in the first place.
In addition, in light of the National Labor Relations Board's (NLRB) complaints against McDonalds and other recent decisions, many franchise systems are concerned about insuring against violations of the National Labor Relations Act. Most EPLI policies also exclude any coverage for National Labor Relations Act claims. Therefore, a franchisor is unlikely to find coverage to insure against this risk. A franchise system must continue to ensure that its franchise agreements and operations manual contain appropriate language to allow a fact-finder to conclude that the franchisor and franchisee are not "joint employers" in the event of a claim. Wage and Hour claims under the Fair Labor Standards Act and similar state laws are typically excluded from coverage as well although policies may provide a defense sub-limit, typically in the $100,000 range. A franchisor should carefully review a franchisee's EPLI coverage and insist upon wage and hour defense coverage, when possible.
Second, review the current franchise agreement provisions related to insurance. The franchise agreement should disclaim any reliance by the franchisee that the franchisor's minimum insurance requirement will be sufficient or adequate in the event of a coverage event. The franchise agreement should also clearly state that the franchisor's review or verification that the franchisee's coverage complies with its contractual requirements does not reduce or eliminate franchisee's obligation to confirm its policies are in compliance with the franchise agreement.
Finally, remember that even if a franchisee fails to obtain an additional insured endorsement, a franchisor may be able to obtain coverage under an "insured contract" coverage. Franchisors should have their indemnity provisions in their franchise agreements reviewed by counsel to make sure they conform to a policy's insured contract requirements.
There are many issues to consider when it comes to franchisee insurance coverage so it is critical that every franchise have a knowledgeable and experienced broker and insurance counsel on hand.
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.
