My franchise agreement requires insurance — what do I actually need?
What you need is whatever the insurance exhibit in your own franchise agreement says, and nothing in a blog post, a brochure or another operator's policy replaces it. Read it line by line for the limits, the parties it makes you add to your policy, the notice and certificate terms and the insurer's financial rating, then have a broker match each line before you open. This page is about your commercial restaurant policies (liability, umbrella, property and workers' comp), not personal insurance.
Photo by Ansaf Ahmad
on Unsplash
- The insurance article and exhibit in your signed agreement are the only authority. The disclosure document describes them; it does not replace them.
- Most of the cost and most of the mistakes sit in a few lines: the extra-liability limit, the "pays first" wording, a short notice period, proof due before opening, and matching every unit you run.
- Send back a certificate plus the written add-ons to your policy, never the policy itself.
Where do my franchise agreement's insurance requirements actually live?
In the insurance article of the franchise agreement itself and in the exhibit attached to it. The disclosure document you received before signing points to them and describes them, but the signed agreement is the only authority on what you must carry.
Federal rules set out how that disclosure document is organized. It lists the estimated cost of getting open, including every expense the franchise agreement requires. It has a table of your main obligations that points to the agreement sections where each one is spelled out. And it must attach the proposed agreements as part of the document. (Source: Federal Trade Commission, Franchise Rule Compliance Guide) The terms you will be held to are in the attached agreement.
Whether your agreement is with a national burger brand, a pizza chain or a regional coffee franchisor, each has its own insurance exhibit. This article does not say what any of them require, because only your copy can tell you. It shows you how to read yours. If you also run a leased building, the same exercise applies to the lease — see our guide to what a landlord asks for in a restaurant lease — and our page on franchise restaurant insurance covers how franchise programs are put together.
What clauses will the insurance exhibit contain?
Expect the same handful of lines in every exhibit, with different numbers: how much each policy pays, who else is covered, what your insurer gives up, how much notice you owe, what proof is due and when, and how financially strong the insurer must be.
- Minimum limits. Two numbers per policy: the most it pays for one incident, and the most it pays for everything in the year — the yearly ceilingAggregate Limit The most your policy will pay for all claims combined during the policy year, no matter how many there are. Insurers call this the aggregate limit. more →. The yearly figure is the one that matters if you operate several units under one policy. (Source: IRMI)
- The franchisor added to your policy. Your liability policy is extended to defend and pay for the franchisor when a claim arises from your restaurant — insurers call the franchisor an additional insuredAdditional Insured Another person or business covered under your liability policy for claims tied to your work or property, such as a landlord or general contractor. Insurers call them an additional insured. more →. The exhibit may also name parent companies and affiliates, so copy the exact names. (Source: IRMI)
- Your insurer gives up its right to go after them. After paying your claim, your insurer normally can recover its money from whoever caused the loss. The exhibit may ask it to waive that against the franchisor, which insurers call a waiver of subrogationWaiver of Subrogation A policy add-on where your insurer gives up the right to pursue a party you agreed by contract not to blame after a loss. Insurers call it a waiver of subrogation. more →. (Source: IRMI)
- Extra liability coverage on top. Many exhibits ask for a layer above your base liability policy. That is an umbrella policy, and our explainer on whether you need an umbrella policy shows how it stacks.
- Notice of cancellation. A set number of days' warning to the franchisor before your policy ends or is changed.
- Certificates. What proof to send, to whom, before opening and at every renewal. Our explainer on what a certificate of insurance is covers the form.
- The insurer's financial rating. Usually a letter grade, explained in the next section.
What does the insurer rating in the exhibit mean?
It is a financial-strength grade from AM Best, a rating agency for insurers. "A-" is the lowest of the four steps in AM Best's "Excellent" band, so the clause rules out insurers graded below it.
AM Best's scale runs from A++ down to D. The top band, "Superior," holds A++ and A+. The next band, "Excellent," holds A and A-. Below those come "Good" (B++ and B+), "Fair," "Marginal," "Weak" and "Poor." Each grade is the agency's opinion of an insurer's ability to meet its ongoing insurance obligations — it says nothing about how that insurer treats claims or whether a particular policy suits you. (Source: AM Best, Guide to Best's Financial Strength Ratings)
What to do with that: read the exact grade your exhibit names, whether it says "or better," and whether it asks for anything else about the insurer. Then ask your broker to confirm the insurer's current grade before you buy, not after the certificate is sent. A cheaper quote from an insurer below the line is unusable.
What is expensive or easy to miss when matching the exhibit?
Five lines cause most of the cost and most of the misses: the extra-liability limit, "pays first" wording, a short notice period, proof due before opening, and matching every unit.
- An extra-liability limit above what the lease asks. One policy has to satisfy every contract you sign, so the highest number across your franchise exhibit and your lease sets what you buy. Compare the two side by side.
- "Pays first" wording. The exhibit may ask that your policy pay first and not ask the franchisor's own insurance to share the cost. Insurers call this primary and non-contributoryPrimary and Non-Contributory A contract-required setting where your policy pays first on a claim and does not ask the other party's insurance to share. Insurers call it primary and non-contributory., and it is easy to overlook. It can need two things: wording on the base liability policy and matching wording on the umbrella, which by design sits above the base policy. (Source: IRMI) Ask your broker to confirm it on both.
- A short notice period. If the exhibit asks for more warning than your insurer will commit to, you are out of compliance the day the policy starts. Ask the insurer what it will give in writing before you agree to the number.
- Proof due before opening. Many exhibits want certificates in the franchisor's hands before your doors open, and builders and equipment installers start work well before that. Start the quote when the build-out starts.
- Matching across every unit. If you run or add units, check that each location, each legal entity and each brand you hold is named on the policy and on the certificate. Operators with more than one brand have more than one exhibit; the policy has to meet the strictest line from all of them.
What do I send back to the franchisor?
Send a certificate — a one-page summary of your coverage — together with copies of the written add-ons that name the franchisor and carry the waiver. Do not send the policy. Check the exhibit for who receives it, in what form and by when.
A certificate is evidence that certain types of insurance and limits have been bought (Source: IRMI); the add-ons on the policy are what actually extend protection to the franchisor. Send both, keep copies, and calendar the next delivery; the exhibit decides whether that is every renewal, every change of insurer or a fixed date.
Before you buy, give your agent the whole exhibit, not a summary of it. If you are still choosing an agent, our guide to finding a restaurant insurance agent in your state lists what to check. Send us the exhibit and we'll match it line by line against the coverage we quote.
Frequently asked questions about franchise insurance requirements
Treat it as a gap to close before you open. Ask your agent which line is off and whether a written add-on or a different limit fixes it, and ask your attorney what your agreement says happens when a requirement is not met.
Only if your agreement says so. Look in the insurance article for any approved-insurer or approved-vendor language. If there is none, any licensed agent can place coverage that meets the exhibit.
No. The disclosure document gives an estimate of start-up costs. Your actual price depends on the limits, add-ons and rating in the exhibit and on your own operation, so get a quote built from the exhibit.
Send us the exhibit and we'll match it line by line
Attach the insurance article and exhibit from your franchise agreement to your quote request, so the coverage is built to match what it asks for.