You’ve chosen your franchise, picked a location, planned your training times. But what about insurance? Neglecting to get the most appropriate cover for your business could prove expensive.
Let’s be honest, investigating and investing in business insurance is not the most exciting part of becoming a franchisee. There are far more compelling activities that demand attention as new franchisees set up in business.
However, although taking a shortcut and signing up for the bare minimum insurance cover might seem like a cost effective strategy in the early days when your bank account seems to be haemorrhaging money, it could lead your business to financial difficulty if your ability to trade is compromised.
“Almost all franchisors have compliance requirements for franchisees to have insurance, explains Darryl Morris, director at National Franchise Insurance Brokers. Compliance is different with each group but the minimum requirement is for public liability cover, whether the business is retail, or non-retail.
For retail franchisees the landlord will most likely dictate the amount, usually $20 million, says Morris. Non-retail businesses without a tenancy will be looking at an amount closer to $10 million, he suggests.
For retail operators, the franchisor will have recommended levels of cover, but in most cases only public liability is compulsory.
Morris, pictured, is adamant there should be other insurance listed as necessary cover. “It’s a failing in the system that franchisors don’t make business interruption insurance compulsory for retail franchisees,” he says, as much for the franchisor’s own benefit as the franchisees.
The cover is designed to protect lost gross trade if the franchisee is unable to operate. It benefits the franchisee who without an income can still manage financial commitments – loans, rents, and living expenses, and of course royalties. A franchisor is likely to be missing out on royalty payments when an uninsured franchisee is not trading.
HELP FOR FRANCHISEES
In many cases a new franchisee buying into a network will have a recommended supplier to contact for insurance – a company that knows the business and what level of insurance is preferred; the business might have a pre-determined package that will tick the boxes.
However, the franchisor cannot insist that a franchisee work with a recommended supplier; a franchisee can arrange insurance with whichever company they choose, so long as the cover is compliant.
The disclosure document outlines the insurance requirements, and franchisees are then required to provide a certificate of insurance to the franchisor to show compliance.
WHAT TYPES OF COVER MIGHT YOU NEED?
Morris highlights eight distinct insurance options as important for any tenancy-based business (and some of them are equally important for mobile or service based businesses).
- Fire and perils, covers machinery, plant, fixtures and fittings, stock
- Business interruption
- Money cover – on premises/at home, and to/from the bank
- Glass – breakage of internal (showcases, counters for instance) and external
- Machinery breakdown
- Deterioration of stock
- Public liability – compulsory
Any franchisee with employees will need to add in workers compensation to the list. Mobile operators might add goods and stock cover to the mandatory public liability, and professional indemnity is appropriate for anyone offering advice. Then there is personal accident or sickness or incident protection to consider.
It’s important to evaluate your risks and financial back-up; and sometimes it pays to be insured for a low level risk.
Here’s a perspective on the need for flood cover: imagine your outlet is well situated on the upper floor of a shopping centre and unlikely to succumb to flood waters. But when the local river overflows and causes damage to the shops on the lower level, access to the centre is cut off. That means your shop cannot conduct business.
If you don’t have flood cover (even though your business is not affected) and are therefore not insured against prevention of access, then that’s a problem, says Morris.
Now all franchisees are given the opportunity to consider flood insurance which is priced according to their exposure to the risk. For the last couple of years the insurance has been rated according to street location rather than postcode, he says.
What’s important is to review the risks and understand what insurance might be a good investment for your particular business.
Morris believes some franchisors are very good at following up certificates and ensuring they match compliance but unfortunately most don’t. This is a concern for the franchisee, whose business is at risk, and a concern for the franchisor who needs the brand protected.
So don’t rely on your franchisor as the final checkpoint for your insurance – a franchisee has the onus of responsibility. It’s up to you to get it right.