The State of Third-Party Insurance Verification – Research Report
February 11, 2021
When a franchise owner has the correct insurance coverage, they’re demonstrating to their franchisees, employees, and customers that they’re doing the right thing by taking responsibility as a business owner. Those who think: “It can’t happen to me…” are not only exposing their franchisees to significant risk, but are also exposing themselves to vicarious liability, which means they’re at risk of being litigiously pulled into allegations and claims that happen at a franchisee’s location.
General liability insurance is typically required to own a franchise, but it often doesn’t end there, because having proper coverage can make the difference between a claim that costs the whole franchise their business or enabling franchise owners to protect what they’ve worked hard to build.
In addition to meeting and maintaining general and professional liability requirements, most franchise owners – depending on the nature of their products or services – might also ask franchisees to carry additional coverage like workers compensation, auto, and even cybersecurity insurance, to name a few, as a means to mitigate their risk and protect themselves from incurring both physical and reputational damage.
Here are three examples that illustrate the impact of vicarious liability and the need for franchisors to verify multiple insurance types to protect their franchisees and customers:
Example 1: A restaurant chain employs several hundred drivers. Some are handling meal delivery service to customers, some are delivering commercial food and equipment to the franchisee, and some are driving for local marketing purposes (e.g. wrapped vehicles, roof signs, dropping off promotional materials, etc.) If any of these employees get into an accident and the franchisee doesn’t have proper auto insurance coverage – or if they don’t list the franchisor as an additional insured – it not only puts the franchisee’s business at risk, but it also puts the franchisor at risk, which is why tracking certificates of insurance (COIs) is so important. Bottom line: it doesn’t matter if they’re an independent contractor or a third party, they are still associated with your brand.
Example 2: A residential remodeling business that sends contractors to work inside a customer’s home requires each franchise to have general liability, bodily injury, and property damage coverage. Should a claim be made a day, week, or even a month after project completion, citing that the work that was done has damaged other areas in the house. If a franchisee doesn’t have completed operations coverage (which falls under general liability), and if the franchise owner can’t adequately verify and track those COIs, they run the risk of having to pay for physical damages in a customer’s home or incurring reputational damage in response to the customer’s complaint.
Example 3: A waste hauling company that services several major retail, grocery, and other big box stores requires their franchisees to carry multiple insurance types (e.g. general liability, property, auto, umbrella, workers compensation, etc.) to ensure the safety of their drivers and brand reputation. Each retail partner also has their own coverage requirements that the waste hauler must meet before they can do business with them. Having to manually verify COIs for multiple sets of coverage requirements is a full-time job in and of itself. Add continuous monitoring to the arduous task, and the waste hauler business is now spending an inordinate amount of time making sure they (and their network) are covered in the event of an accident.
Franchisors must assess their risk and make sure they understand exactly what their franchisees sell. Most franchisors include generic insurance requirements in their Franchise Disclosure Documents (FDDs), but whether they’re a restaurant, a retailer, or an in-home care provider, one thing that’s recommended is to be specific and direct about what coverage is required to avoid a liability loss. Make sure franchisees know exactly what type of insurance they’re required to have, and follow up to ensure their coverage doesn’t lapse.
Tracking COIs is a challenge. Insurance policies drift in and out of compliance depending on when they were purchased and the length of their coverage, which is made all the more challenging when a franchisee is required to have multiple coverage types and the franchise owner has trouble tracking them all. It pays to automate the process – from COI collection and verification to policy renewals and fulfillment.