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When buying a franchise, you’ll see it listed in the estimated initial investment and ongoing fees charts in the Franchise Disclosure Document (FDD) for every franchise: Insurance.
Often, aspiring business owners are told to secure insurance with the premise of planning for the worst and hoping for the best. But what does that mean exactly for a new franchise owner?
Doug Groves has over 30 years of experience in the insurance industry, and is also an area developer for multiple franchises. He brings his expertise of the franchise industry to program insurance and certificate management services through Program Insurance Group, a company he founded that offers insurance products and services tailored to the franchise community. One of those products is EZ Cert, a real-time insurance compliance solution that helps franchisees to secure any missing insurance coverage and become fully compliant.
Recently, Doug took the time to answer five questions that new franchisees should know the answer to about insuring their franchise. Doug's responses are in italics.
Most people would know they need general and professional liability insurance, maybe even workers compensation insurance, to open a business. But why are these so important?
First and foremost a business is supposed to do the right thing and be socially responsible for its actions. This responsibility extends to not only the customers the business serves, but to the employees who do the work.
Making sure your business can defend [itself from] a lawsuit from the general public for your actions or lack thereof is just the right thing to do. The core principal of insurance is to pay a few small sums into a pool, so in the off chance an injury or fire happens, you can collect your total loss back from the pool. Having proper insurance can be the difference between a claim putting you out of business or protecting what you have worked hard to build.
What's the most common mistake new franchisees make in regards to getting insurance?
New franchisees need to avoid under-insuring exposures. We most often see cases in which liability coverage has limits that do not protect the franchisee's personal net worth, or new franchisees not purchasing umbrella insurance to extend limits and coverage.
A new franchisee might evaluate policies solely on price because of the other spend involved in getting open as opposed to working with an experienced agent who knows the associated industry risks. Even if the FDD of the franchisor is written correctly, making sure franchisees have independent coverage in place protects the brand and the franchisee at the same time.
If a franchisee has a fire, is under-insured and cannot repair or rebuild, ultimately the franchisor and brand can be damaged. This is why brands should use a third party insurance compliance company to verify, verify, verify.
For “extreme exposure” franchise industries (e.g. child care, elder care, lawn services, restaurants, hair care, contractors), what are some other types of insurance they might need?
Typically, the policies are very much the same—general liability, property, workers compensation, auto, and umbrella—but the limits can vary drastically and so can coverage or even exclusions for an “extreme exposure.”
Depending on the exposure, a much higher umbrella limit might be required, or errors & omissions insurance could be crucial for the work or service offered. It depends on where the risk is highest; ask yourself “What am I most likely to be sued for?” and ensure your limits and coverage are more than adequate.
An independent agent will make sure policies are shopped across the market and not just one market. Rates can vary dramatically, so the agent needs to be familiar with your business. If the business is extremely risky or unusual regarding liability or property damage issues, a good agent will guide you through surplus markets. This is where an agent will advocate for you by helping you understand your special risk and the wording of your particular circumstances and needs.
In other words, a knowledgeable agent can help save and secure your assets.
Are there any new insurance needs because of COVID-19?
All reputable insurance providers are staying current regarding legislation about waivers for liability exposures for customers and employers through this pandemic. COVID has brought to light some types of insurance that are currently not as prominent as they might become in the future.
With more employees working from home, data is being shared in completely new ways, and the potential for data breach, hacking, ransomware, phishing attacks, and the like has skyrocketed. The industry is also facing questions of how worker’s compensation will change for employees who work from home and are injured on the job. Directors & officers insurance is also being looked at in a new respect after companies are questioning how their leaders and board of directors reacted to the pandemic.
It’s clear this topic is evolving daily and will likely see a great deal of activity over the next couple of years.
What else should new franchisees know about insurance?
Insurance, like many consumer products, is a cost of doing business in which “you get what you pay for.”
If you experience a wide range of pricing among options, most likely the coverage you are reviewing is different. If the business is one that will not experience any losses, a franchisee could be fine with the lowest premium. However, with almost all business, if there is a chance of loss through an employee, customer, vendor or health and safety issue, it is critical to know you have an agent that fully understands your business, you know who the coverage is with, and you are familiar with how claims are going to be paid.
Franchisees should visit with their franchisor and with other business owners who are in their similar field to understand what can work best for them. They should also be confident in the insurance agent with whom they work, expect support as needed, reviews of coverage annually, and see the agent active within the franchise…even participating in annual meetings and conventions.