As the franchise business model continues to flourish across Canada, managing statutory liability risks continues to be a concern for franchisors. Franchisor insurance has long been available to American franchisors. Insurers have recently turned to Canada as a good market for their franchisor insurance products.
Do I need franchisor insurance?
Of particular concern to franchisors is the risk of liability for making improper statutory disclosure. A statutory rescission remedy allows franchisees to recover their investments (and any greater losses) within two years of entering into a franchise agreement, if they received deficient disclosure. Rescission claims are a serious risk for franchisors of all kinds and sizes. Franchisors are also exposed to damages claims associated with poor disclosure or claims for misrepresentations made in their disclosure documents. An insurance policy tailored to the franchise context intends to minimize some of the most concerning risks facing franchisors, including claims for rescission.
What should my policy cover?
Any losses incurred in connection with a rescission claim should be explicitly insured under a franchisor insurance policy, to the extent available. There are two additional claims established by provincial franchise legislation that pose concern for franchisors. Franchisees have rights to damages if the franchisor breaches its fair dealing duty or if it interferes with a franchisee’s right to associate with others. Given the unpredictable nature of these types of claims, and the fact that a franchisor’s liability for them would stem primarily from its performance of the franchise agreement (i.e. a contractual breach), franchisor insurance is unlikely to cover these claims. Typical policy exclusions are discussed below.
Who should my policy cover?
When selecting a policy, it is important to understand whom the policy covers. A franchisor will likely want to insure its employees (including its directors and officers) and any independent contractors, such as a franchise sales broker or other agents. However, franchisors can expect that a policy will only cover independent contractors who are indemnified by the franchisor in their contracts. As such, when franchisors engage sales brokers whom they intend to protect under their insurance umbrella, the appropriate language must be included in their contracts.
What forms do insurers use to cover franchisors?
A franchisor insurance policy will often come in the form of a rider to a standard directors’ and officers’ liability policy. The rider will amend the policy to cater to a franchisor’s specific concerns, including coverage for costs under the relevant provincial franchise statute, and for losses incurred in connection with claims for rescission or damages for misrepresentation. The base insurance policy being amended may also include coverage for errors and omissions committed by franchisors or their employees in the course of providing professional services to franchisees (for example, a franchisor’s accountant or in-house lawyer who also advises the franchisees).
What will be excluded from my policy?
Although the policy will be tailored to the franchise context by way of a rider, as with most insurance policies, deliberate criminal or fraudulent acts will not be covered. Pending or prior litigation (commonly known as “pre-existing conditions”) will also be excluded, along with environmental clean-ups. Franchisors should not expect to be covered for general breaches of contract, such as for a failure to provide adequate training or support to their franchisees (i.e. a fair dealing claim). To the extent that the policy covers employment claims, franchisors need to consider whether they have coverage if they are found to be “joint employers” with their franchisees. Policies will also exclude certain components of losses commonly attributed to a rescission claim. For example, misrepresentations made by the franchisor in its franchise agreement will likely fall under the exclusion for contractual liability and coverage will be barred for such claims. Franchise fees received by the franchisor which it may have to refund to the franchisee following a successful rescission claim can also be expected to be excluded from the policy.
What else should I look for in a policy?
Other important considerations are the monetary limits per claim and any territory restrictions on the policy. Since franchisor insurance is relatively new in Canada, annual premiums may vary widely depending on the number of insurers in the Canadian market. Of course, the actual amount of any premium will be heavily influenced by various factors such as the franchisor’s size, territory coverage, claims history, and financial health, among others.