As a franchisor of a chain there are three main insurance policies/coverages that we highly recommend from a risk management perspective that can really help protect against significant costs and reputational harm.
1. Franchisor’s Errors and Omissions:
Franchisors may need Errors and Omissions (E&O) insurance to protect against claims of professional negligence or errors and omissions in the services they provide to their franchisees. E&O insurance can provide coverage for legal defense costs, settlements, and judgments resulting from allegations of mistakes, omissions, or errors in the franchisor’s services, advice, or recommendations.
For example, a franchisor may be accused of providing inadequate training or support to a franchisee, which led to the franchisee’s failure to comply with legal or regulatory requirements. E&O insurance can help to cover the costs of defending against such claims and any resulting damages.
E&O insurance is particularly important for franchisors because they are responsible for providing a wide range of services and support to their franchisees, including training, marketing, operational support, and ongoing guidance. If a franchisor fails to deliver on these promises, it can lead to legal disputes and financial liabilities.
2. Directors and Officers Liability:
A franchisor, like any other business, can face legal and financial risks that may arise from the decisions and actions of its directors and officers. These risks may include allegations of breach of duty, fraud, mismanagement, or other wrongful acts.
Directors and officers (D&O) liability insurance is designed to protect the personal assets of directors and officers, as well as the assets of the company, against claims and lawsuits arising from their decisions and actions. The policy typically covers legal defense costs, settlements, and judgments, which can be significant.
For a franchisor, D&O insurance can be particularly important because of the complex nature of the franchise relationship. Franchisors have a legal obligation to provide support, guidance, and training to their franchisees, and they may be held liable if a franchisee violates laws or regulations or causes harm to customers.
In addition, franchisors may face lawsuits from franchisees over issues such as contract disputes, intellectual property infringement, or misrepresentation. D&O insurance can provide protection for the franchisor’s directors and officers in these situations, as well as help to safeguard the financial health of the business.
3. Employment Practices Liability (EPLI):
Franchisors may also need Employment Practices Liability Insurance (EPLI) to protect against claims by employees or former employees of discrimination, harassment, wrongful termination, or other employment-related issues. EPLI can provide coverage for legal defense costs, settlements, and judgments resulting from these types of claims.
Franchisors are responsible for ensuring that their franchisees comply with employment laws and regulations and may be held liable if a franchisee violates these laws or engages in discriminatory or wrongful employment practices. Additionally, franchisors themselves may face claims of discrimination or harassment by their own employees or former employees.
EPLI can help to cover the costs of defending against these claims, as well as any resulting damages. EPLI can also provide assistance with compliance and risk management, helping franchisors to avoid or mitigate employment-related issues in the first place.