June 2007 Franchising World
Ensuring that the relationship between franchisee and franchisor remains positive is always important. Many different aspects of how this relationship can be maintained have been discussed under the topic of franchise relations. One important topic not often addressed is ensuring a positive franchise relationship through insurance.
By Janice M. Dwyer, CFE
So often today, when a franchisee is sued for any reason, the franchise parent is also named as a defendant in the lawsuit. Some argue that the plaintiffs are going after the “big money” of the franchise system, while others suggest that the plaintiffs neither appreciate nor understand the relationship between a franchise brand and franchisee. Whatever the reasons, both franchise company and franchisee alike must pay attention to how their insurance policies are designed to protect their interests in the event of lawsuits.
If a franchise organization had to defend each claim made against it for a franchisee’s actions and operations, it would be left with significantly less resources to maintain and grow the system. This is why franchise agreements frequently contain a “hold harmless” indemnification provision, which requires that the franchise system hold harmless and indemnify the franchise company for, among other things, acts, errors, omissions or negligence arising out of the franchisee’s operations.
In addition, a franchisee often agrees, according to the terms of the franchise agreement, to include its franchise company on its commercial general liability insurance as an additional-insured. This additional-insured coverage provides the protection a franchisee needs to support its indemnity agreements. If a franchisee fails to have adequate insurance coverage, it could be held responsible to indemnify the franchise company out-of-pocket.
Additional-Insured Status
This is why the additional-insured status for franchise companies on franchisees’ insurance policies can be crucial in the franchising relationship. The cost for a franchisee to include the franchise system as an additional-insured on its insurance policies is minimal or can often be at no additional cost. However, the cost to the relationship, if the additional-insured status is incorrectly done or not done at all, can be significant.
Regrettably, all too often, requests for additional-insured status are handled or processed routinely by many insurance representatives. The requests need to be given priority and proper attention due to their importance to the franchising relationship. However, many agents fail to understand what the additional-insured status means in the franchise relationship, as well as the reason behind the coverage request itself. This lack of attention and failure to understand can result in a serious misapplication of coverage, or worse, no coverage at all.
Likewise, many franchise organizations routinely treat this additional-insured insurance status process as just another administrative function. As easy as it may appear at first glance, mistakes are all too common. It is not enough for a franchise company to accept a certificate of insurance from its franchisee showing that the system as a certificate holder is also an additional-insured on the franchisee’s policy. A review of coverage granted by the additional-insured endorsement itself must be conducted.
Review of Coverage
When reviewing certificates of insurance in most cases, policy numbers, insurance carrier, and policy period are listed, but these do not guarantee that the franchise company has the coverage it wishes or requires. So, a franchise system must insist at a minimum that a copy of the additional-insured endorsement itself be included, so that the terms and conditions of the actual additional-insured endorsement may be reviewed. Where a franchise firm looks to rely primarily for its insurance protection as granted by an additional-insured endorsement on a franchisee’s policy, the company must make the attachment of the complete insurance policy for its review a requirement.
In addition, it is important to remember that the terms and conditions of a certificate of insurance may contradict the terms and conditions, or the intent of the insurance policy itself. The terms of the policy will almost always prevail over those on a certificate. The terms of the certificate usually clearly indicate that the certificate is not an insurance policy, and that any coverage granted is done so only through the policy itself, which includes the additional-insured endorsement.
Further, even where proper review and compliance actions occur, the franchise relationship will be compromised if a franchisee cancels the insurance policy or the policy is cancelled for nonpayment of premium. According to the cancellation provisions of the policy, notice is sent to the franchisee as the “first named insured on the policy,“ not to an additional-insured. Cancellation notice for an additional-insured is not guaranteed. So, a franchise company as additional-insured needs some mechanism beyond a certificate of insurance to assure that actual coverage exists when it is needed. Often franchise systems pay particular attention to those franchisees that are late in making royalty payments. This may be an indication that they have let their insurance coverage lapse.
Ensuring Consisted Coverage
What should franchise organizations and franchisees alike be looking for to make sure that insurance coverage is consistent with the requirements of most franchise agreement indemnification clauses?
Request the additional-insured Grantor of Franchise Form CG2029 or an insurer’s comparable form. Coverage under this form provides protection for a franchise system with respect to its liability as grantor of a franchise to the named insured (franchisee). This form is simple, it has no additional exclusions or conditions, and it does not attempt to define in what manner a franchise company is held liable for coverage considerations.
What coverage is often provided a franchise system? It is Form CG2010 or an insurer’s comparable form, additional-insured-owners, lessees or contractors- scheduled person or organization. This is the catch-all additional-insured form most often used to comply with additional-insured requests for coverage.
This form is not only inappropriate, but also the major disadvantage is that it is limited to ongoing operations only. Unfortunately, lawsuits are not so limiting. For example, this means that coverage for a franchise company ends when a franchisee-plumber finishes a job, or a diner finishes eating and leaves a franchised restaurant, or a customer drives his auto away after repairs are completed by a franchised auto repair. Unfortunately, lawsuits do not dovetail with this coverage. For example, a plumber often gets sued for pipes failing in the future, a restaurant diner often gets ill after he leaves the restaurant premises and a defect in an auto repair often becomes apparent after the vehicle leaves the repair shop.
To protect the franchise relationship, franchise companies and franchisees must be proactive. Both must instruct their respective insurance brokers or consultants not to accept insurance that is inconsistent with the indemnification provisions of the franchise agreement. Both must be vigilant in demanding the use of the additional-insured endorsement appropriate for the franchise relationship. The proper focus on the detail of this additional-insured matter results in the appropriate insurance protection benefits not only for the franchisee, but also for the franchisors. What better way is there to ensure positive franchise relations?
Other items of note
• If a franchisee fails to add the franchise company as an additional-insured properly, the franchisee’s policy does not protect the franchisee for this failure.
• Medical payments coverage on a franchisee’s policy will not apply to franchise organization as additional-insureds.
• All exclusions on the policy that apply to the franchisee will apply to the franchise system.
• The named insured on a franchisee’s policy should be the same entity who signed the franchise agreement. Did your franchise sign as an individual, and then formed a corporation or an LLC later?
• Defense coverage provided to a franchise system on a franchisee’s policy may require separate defense counsel and strategy due to separate strategy. Know your rights.
• Ask that additional-insured status be primary and non-contributory.
• A franchise company’s umbrella policy is usually primary coverage over a franchisee’s umbrella policy, unless otherwise indicated.
• Make sure the additional-insured form lists all parties to be indemnified including employees, officers and directors of a franchise organization.
Janice M. Dwyer, CFE, is president of the Affinity Group Division of the law firm Luce, Smith & Scott Inc. She can be reached at 800-642-8338.
Ensuring that the relationship between franchisee and franchisor remains positive is always important. Many different aspects of how this relationship can be maintained have been discussed under the topic of franchise relations. One important topic not often addressed is ensuring a positive franchise relationship through insurance.
By Janice M. Dwyer, CFE
So often today, when a franchisee is sued for any reason, the franchise parent is also named as a defendant in the lawsuit. Some argue that the plaintiffs are going after the “big money” of the franchise system, while others suggest that the plaintiffs neither appreciate nor understand the relationship between a franchise brand and franchisee. Whatever the reasons, both franchise company and franchisee alike must pay attention to how their insurance policies are designed to protect their interests in the event of lawsuits.
If a franchise organization had to defend each claim made against it for a franchisee’s actions and operations, it would be left with significantly less resources to maintain and grow the system. This is why franchise agreements frequently contain a “hold harmless” indemnification provision, which requires that the franchise system hold harmless and indemnify the franchise company for, among other things, acts, errors, omissions or negligence arising out of the franchisee’s operations.
In addition, a franchisee often agrees, according to the terms of the franchise agreement, to include its franchise company on its commercial general liability insurance as an additional-insured. This additional-insured coverage provides the protection a franchisee needs to support its indemnity agreements. If a franchisee fails to have adequate insurance coverage, it could be held responsible to indemnify the franchise company out-of-pocket.
Additional-Insured Status
This is why the additional-insured status for franchise companies on franchisees’ insurance policies can be crucial in the franchising relationship. The cost for a franchisee to include the franchise system as an additional-insured on its insurance policies is minimal or can often be at no additional cost. However, the cost to the relationship, if the additional-insured status is incorrectly done or not done at all, can be significant.
Regrettably, all too often, requests for additional-insured status are handled or processed routinely by many insurance representatives. The requests need to be given priority and proper attention due to their importance to the franchising relationship. However, many agents fail to understand what the additional-insured status means in the franchise relationship, as well as the reason behind the coverage request itself. This lack of attention and failure to understand can result in a serious misapplication of coverage, or worse, no coverage at all.
Likewise, many franchise organizations routinely treat this additional-insured insurance status process as just another administrative function. As easy as it may appear at first glance, mistakes are all too common. It is not enough for a franchise company to accept a certificate of insurance from its franchisee showing that the system as a certificate holder is also an additional-insured on the franchisee’s policy. A review of coverage granted by the additional-insured endorsement itself must be conducted.
Review of Coverage
When reviewing certificates of insurance in most cases, policy numbers, insurance carrier, and policy period are listed, but these do not guarantee that the franchise company has the coverage it wishes or requires. So, a franchise system must insist at a minimum that a copy of the additional-insured endorsement itself be included, so that the terms and conditions of the actual additional-insured endorsement may be reviewed. Where a franchise firm looks to rely primarily for its insurance protection as granted by an additional-insured endorsement on a franchisee’s policy, the company must make the attachment of the complete insurance policy for its review a requirement.
In addition, it is important to remember that the terms and conditions of a certificate of insurance may contradict the terms and conditions, or the intent of the insurance policy itself. The terms of the policy will almost always prevail over those on a certificate. The terms of the certificate usually clearly indicate that the certificate is not an insurance policy, and that any coverage granted is done so only through the policy itself, which includes the additional-insured endorsement.
Further, even where proper review and compliance actions occur, the franchise relationship will be compromised if a franchisee cancels the insurance policy or the policy is cancelled for nonpayment of premium. According to the cancellation provisions of the policy, notice is sent to the franchisee as the “first named insured on the policy,“ not to an additional-insured. Cancellation notice for an additional-insured is not guaranteed. So, a franchise company as additional-insured needs some mechanism beyond a certificate of insurance to assure that actual coverage exists when it is needed. Often franchise systems pay particular attention to those franchisees that are late in making royalty payments. This may be an indication that they have let their insurance coverage lapse.
Ensuring Consisted Coverage
What should franchise organizations and franchisees alike be looking for to make sure that insurance coverage is consistent with the requirements of most franchise agreement indemnification clauses?
Request the additional-insured Grantor of Franchise Form CG2029 or an insurer’s comparable form. Coverage under this form provides protection for a franchise system with respect to its liability as grantor of a franchise to the named insured (franchisee). This form is simple, it has no additional exclusions or conditions, and it does not attempt to define in what manner a franchise company is held liable for coverage considerations.
What coverage is often provided a franchise system? It is Form CG2010 or an insurer’s comparable form, additional-insured-owners, lessees or contractors- scheduled person or organization. This is the catch-all additional-insured form most often used to comply with additional-insured requests for coverage.
This form is not only inappropriate, but also the major disadvantage is that it is limited to ongoing operations only. Unfortunately, lawsuits are not so limiting. For example, this means that coverage for a franchise company ends when a franchisee-plumber finishes a job, or a diner finishes eating and leaves a franchised restaurant, or a customer drives his auto away after repairs are completed by a franchised auto repair. Unfortunately, lawsuits do not dovetail with this coverage. For example, a plumber often gets sued for pipes failing in the future, a restaurant diner often gets ill after he leaves the restaurant premises and a defect in an auto repair often becomes apparent after the vehicle leaves the repair shop.
To protect the franchise relationship, franchise companies and franchisees must be proactive. Both must instruct their respective insurance brokers or consultants not to accept insurance that is inconsistent with the indemnification provisions of the franchise agreement. Both must be vigilant in demanding the use of the additional-insured endorsement appropriate for the franchise relationship. The proper focus on the detail of this additional-insured matter results in the appropriate insurance protection benefits not only for the franchisee, but also for the franchisors. What better way is there to ensure positive franchise relations?
Other items of note
• If a franchisee fails to add the franchise company as an additional-insured properly, the franchisee’s policy does not protect the franchisee for this failure.
• Medical payments coverage on a franchisee’s policy will not apply to franchise organization as additional-insureds.
• All exclusions on the policy that apply to the franchisee will apply to the franchise system.
• The named insured on a franchisee’s policy should be the same entity who signed the franchise agreement. Did your franchise sign as an individual, and then formed a corporation or an LLC later?
• Defense coverage provided to a franchise system on a franchisee’s policy may require separate defense counsel and strategy due to separate strategy. Know your rights.
• Ask that additional-insured status be primary and non-contributory.
• A franchise company’s umbrella policy is usually primary coverage over a franchisee’s umbrella policy, unless otherwise indicated.
• Make sure the additional-insured form lists all parties to be indemnified including employees, officers and directors of a franchise organization.
Janice M. Dwyer, CFE, is president of the Affinity Group Division of the law firm Luce, Smith & Scott Inc. She can be reached at 800-642-8338.
Labels: Franchise Opportunity
0 Comments:
<< Home | << Add a comment