Top 5 ways to reduce franchisor’s vicarious liability
Doug Imholte
Franchisors continue to face increased exposure from Vicarious Liability claims. Vicarious Liability is the term given to the fact that you, the franchisor, could be held liable for acts arising out of your franchisees’ activities and/or incidents happening at their location. Claims arising from these incidents should fall under the franchisee’s insurance policies. However, not all policies are created equal and so these risks could be awaiting you and your franchise.
Today, vicarious liability claims against franchisors can and do extend to virtually every area of the franchise system, such as:
Franchisee auto & driving exposure
Personal injury to a franchisee’s customer
Food-borne illness
Product liability
Sexual Abuse/Molestation allegations
Data privacy/ransomware
These are just a few risks that could entangle the franchisor in claims stemming from franchisees. Franchisors would be well-advised to recognize these factors and put a plan in place to reduce vicarious liability. Look at these 5 important steps to reduce vicarious liability and help protect your system:
Mitigate Risk: Identify those exposures that are unique to your model and put a plan in place to manage and mitigate those. For example, does your system work with kids, is there delivery involved, how about selling products, food preparation or hiring lots of employees? Do you handle personal data from your clients, go into customer’s homes or provide personal services such as hair removal, massage or facials? All are different risks that can expose your brand, and potentially you as the Franchisor, to these risks if not insured properly. Insurance is not a “one-size-fits-all” commodity and you are exposing your brand to risk if you don’t address your key franchisee exposures.
Write Proper Insurance Requirements: Most of the FDD’s I read do not list proper insurance requirements for that system. Too often it simply says that the Franchisee needs to get insurance that is acceptable to the Franchisor. This is a good foundation but in today’s world, the Franchisor needs to provide better clarity as to what insurance is required by the Franchisees. Proper, detailed and tailored language needs to be in the FDD and Operations Manual with respect to what coverages need to be in place. Not doing so exposes your Franchisees and you as the Franchisor to undue risk.
Track and Manage Compliance to these Requirements: Taking one step forward, just having well-defined insurance requirements is not enough. Once you have these requirements, the Franchisor needs to track their Franchisees’ programs in order to maintain compliant to these standards. The best way to do this is collect their Certificates of Insurance to make sure coverages and limits are in place and the Franchisor is listed as Additional Insured.
Manage the Insurance Program Centrally: For some, these first steps may seem over-whelming to implement franchise system wide. But centralization and alignment can be the key to success! There is real value for the Franchisor and Franchisees when they partner with a Franchise industry-focused insurance broker to manage the insurance program. Some of these benefits include: one place for all the certificates, consistency of coverages and communication, leveraging this program with one carrier and gathering claim trends and identifying solutions to reduce future risks and claims. Multiple brokers can bring different processes and opportunity for misalignment that may result in more risk and work to the Franchisor in the end.
Communication to the Franchisees: Proactive communication to the Franchisees is vital and helps maintain a healthy and happy system. The same is true for a tailored insurance program for your system. It is important that Franchisees understand the strategic benefit to them and to the brand of a well-designed and tailored insurance program. Incidents, claims and lawsuits that affect your system impact everyone and can result in loss of business, time taken away from other valuable activities, to Franchisees that go out of business as a result. In today’s evolving franchise environment, a well thought out, designed and implemented franchise insurance program is more important than ever. It can make a difference for you and your Franchisees.
What vicarious liability issues concern you with your franchise system? What potential exposures could impact your franchise? To discuss these concerns around vicarious liability and your franchise system, reach out to the Marsh & McLennan Agency Franchise group today.
This article originally was featured in the January 2020 Franchise Journal Magazine on page 136.
