| Getting Your Franchise Insurance in Compliance |
Over the years, the PizzaSure.com enterprise has worked with franchisees across the country. We've worked with the big boys and some of the smaller ones too. For the sake of this discussion, most references made are to the "Big Boys". Why? Because they are illustrative of all that franchising can be - the Good, the Bad, the Pretty and the Ugly. I won't name names or site anybody's specific contract, but the underlying principals are the same.
The Basics
When you sign on for a franchise, you agree to follow rules and abide by contractual obligations in return for a "cleared path," a proven model to conduct a successful business. In granting the franchise, the franchisor will require you to do a lot of things before you so much as sign a lease of premises. One of those things is to buy insurance - in the type of and at the limits specified in the contract. Fail on this and you are in contract violation - a state of affairs that can lead to your losing your entire franchise investment. So, do not EVER take this lightly.
Remember, a franchise is a legal agreement between you and (usually) a much larger organization. Sometimes this is a publicly traded company, sometimes not. Either way, rest assured that these guys have lawyers and lots of them-and they either have or hired risk managers to map out their insurance strategy. Between the lawyers and the risk managers they lay out a list of insurance compliance items. Following is a list of the ones I usually see. It's not all inclusive (no list ever can be) but it's pretty representative of what you can expect.
Property Insurance
Usually says something like ".The franchisee shall at its own expense, purchase and maintain property insurance of the types and in amounts usual to this type of endeavor." Translation: This is your stuff, buy some insurance that YOU pay for, and you have to keep it in place for the life of the agreement. This is insurance for your property and your risk of loss. They don't get too specific about this one - it's really your decision here as long as you cover any outstanding loans on the new enterprise. For example, if you take a $250k SBA loan to get into this business, the SBA will require you to have insurance to cover that amount.
Liability Insurance:
Usually says something like ".The franchisee shall at its own expense, purchase and maintain Public Liability Insurance of the type and in amount not less than usually $1,000,000." and sometimes more. Here, they usually tell you how much to buy. Then they go one step further, and require you to include the franchisor as additionally insured on your policy.
Important: Terms like 'public liability' and 'personal injury' are meaningless to the insurance industry. You will not get a policy with those words at the top of the page. Lawyers write these contracts using terms that are not necessarily relevant to the insurance world.
Workers Compensation
Depending on your state and that state's law, you may be obligated to buy Workers Comp insurance. This is perhaps the most straightforward part of the whole deal. If you are required to get it, just do it.
Two Caveats:
- Make sure that the insurance company you deal with knows that you deliver! There are a bunch of companies that do not want any delivery exposure. Make sure the application you sign says that you do delivery. Refuse to sign if this is not on the application. It can come back to haunt, hurt and harass you at the time of claim!
- If your state gives you the option to include or exclude yourself, please don't be cheap-include yourself. Usually, the franchise owner is classified as management and takes a really low rate; don't cheat yourself out of this valuable safety net coverage to save a few bucks.
Life Insurance
Some franchisors will require you to have life policy in an amount equal to your finance package. So, if you borrow $250k, you buy a life policy in the same amount for debt cancellation. If you die, the life insurance company pays the debt. It's not a bad thing because it can leave your family in a much better position. After all, who was it that bet the farm on this new venture? You! Why not hedge the bet.
Delivery Liability
Ok, I saved the best for last.The major franchises always require that you buy delivery liability. They differ slightly on how much you should have, but it runs between 1 million and 2 million dollars.
They also tell you about how you should keep tabs on your drivers.like how often you have to pull Motor Vehicle Reports. And, they also have driver standards that you will be made to enforce. They apply on hire and during the course of employment with your franchise.
Compliance Issues
In the end, non-compliance can result in revocation of your franchise agreement.
They are not comfortable with taking your word for compliance. The major franchises have staff or outsourced services that follow up with you and get documentation of your initial and continued (renewal) compliance.
The compliance people will usually start out with a polite letter or fax but woe betide the unfortunate person that ignores them or just doesn't comply. Once you go beyond their "invisible fence" for compliance, you will start getting letters from the legal department. If you just flat out refuse to comply, they can and will suspend your franchise for contract violation.
Summary:
Franchisors are very serious about insurance issues, and many being publicly traded companies, have a 'fiduciary responsibility' to see to it that you meet the requirements of the contract you sign.
The back story is that lawyers for injured people have done their level best to extend the liability that you generate from your operations to the franchisor. The risk management and legal types know that if you don't have insurance, the chances of them getting financially hurt go up exponentially.
What to do
We can help you on this one, feel free to call us and before you sign on the line, do your own due diligence and put together a reliable pro forma with reliable insurance cost estimates. Please, don't rely on the franchisors insurance estimates. contact us in your local venue for some credible pricing, plug this info into your pro forma and go out and make some dough (Sorry, I couldn't resist).
My standing offer, feel free to call me (201-945-3100) I'll do my best to help you.
This article was written by P.J. Giannini, please visit www.pmq.com for more Pizza Industry News.
For more information on franchises or to search for a franchise to purchase please visit www.franchisegator.com.
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