What is Franchise Insurance and How Does it Work?

What Is a Franchise Cover?

A franchise cover is a reinsurance plan whereby the claims from several policies are aggregated to form a reinsurance claim. Franchise covers are also known as loss trigger covers.

Other types of non-proportional reinsurance with aggregate covers are aggregate stop-loss reinsurance and catastrophe covers.


  • A franchise cover, or trigger cover, is a reinsurance plan in which the claims from several policies are aggregated to form a reinsurance claim.
  • The franchise limit is the amount of reinsurance provided to a ceding insurer. 
  • Franchise covers are triggered when a loss benchmark exceeds the predetermined threshold set according to a line of business or the experience of the broader market.

Understanding Franchise Covers

A franchise cover is a form of reinsurance threshold used to limit the amount of reinsurance supplied to a ceding insurer in reinsurance contracts. In many insurance contracts, the insured is required to keep losses up to a particular point, with the insurer only paying losses that surpass that point.

The policy’s coverage limit determines how much money the insurer will payout in the event of a loss. Similar elements can be seen in reinsurance contracts, such as the reinsurer not being responsible for losses until a particular level is reached.

Franchises can be extremely profitable, but they are not without danger. The franchisee owns and operates an independent firm, while the franchisor has the option to build the brand and earn a profit.

One wrong step and a franchise could suffer reputational damage, labor violations, FDD compliance issues, and similar problems. Franchisors tend to have specific insurance requirements as part of their franchisee contract in order to avoid large risks.

At John M. Glover Insurance Agency, we review the required coverages needed to meet the franchisee’s contractual requirements assuring that our franchisees are compliant.

Importance Of Franchise Insurance

When a person agrees to run a franchise, they assume certain responsibilities. All business activities run the risk of affecting employees, customers, and stakeholders either in a positive or negative way.

Acquiring business insurance protects franchise owners from many of the consequences of operating a business.

Insurance For Franchises

Running a franchise is similar to running any business but with some distinct differences. In many cases, the groundwork has already been laid allowing franchise owners to focus on other core business activities.

Examples of the types of insurance policies that all franchise owners should carry to protect their business and its employees include :

  • General Liability Insurance – Also known as commercial general liability, general liability insurance is one of the most sought-after commercial policies for business owners in all industries. General liability insurance protects both the owner and parent company from claims of personal injury if a customer is injured on the premises, such as in a slip and fall accident.
  • Business Interruption Insurance – Sometimes referred to as loss of business income insurance, business interruption insurance covers certain events that occur beyond the owner’s control. Natural disasters, structure fires, government shutdowns, freak accidents and similar events can cause property damage. Business interruption insurance helps cover fixed expenses during the rebuild.
  • Equipment Breakdown Insurance – An equipment breakdown insurance policy can help cover any losses caused by any electrical or mechanical breakdown of business equipment, such as refrigerators or computers. Equipment breakdown policies may cover the cost to repair or replace any property damaged as a result of the breakdown.
  • Commercial Auto Liability Insurance – Many franchises rely on vehicles to run errands, pick up supplies, deliver goods or perform other essential tasks. When a company vehicle suffers damage or is totaled, it can disrupt normal business operations. Commercial auto liability insurance can help cover the cost of an auto repair or replacement in the event of a covered vehicle accident.
  • Excess Liability Coverage – Many franchises invest in excess liability coverage to supplement their other underlying liability insurance policies. Excess Liability can provided additional limits of coverage further protecting their business.
  • Property Insurance -If you are preparing your business franchise you will need a location. Ensuring that location is not only smart but necessary. While it is not easy anticipating damages, thinking ahead will save you money in the long run.
  • Workers Comp Insurance – No matter the franchise, injuries can always happen. Even with company safety protocols, there is still a risk for any employee. Workers compensation insurance covers on-the-job bodily accidents and any diseases or lasting medical problems caused by employment conditions.

Franchise and Excess of Loss

The franchise establishes a minimum level of financial accountability for insurance businesses.
Some insurers believe that completely excluding an amount from a claim is too punitive, therefore they use a different approach by using a franchise.

A franchise applies to the policy in the same way as an excess of loss and for the same reasons, but if a claim exceeds the franchise, the full amount of the loss will be paid.

There is no difference in how the two procedures are handled if a claimant has a modest claim that is below the policy franchise; in neither scenario will any money be paid. If the loss exceeds the franchise limit, however, the entire sum is reimbursed.

Franchise Covers in Practice

A franchise cover is triggered when a loss benchmark exceeds a predetermined threshold, at which point the reinsurer will cover the ceding insurer’s losses.

The benchmark may be set to losses experienced by a particular line of business ceded by the insurer, or it may be set to losses experienced by the broader market.

If the threshold is set to the experience of the broader market, the reinsurer and ceding insurer will agree on the exact benchmark to use and indicate this in the reinsurance contract.

Example of Franchise Covers

For example, a property insurance company enters into a reinsurance contract with a franchise cover. The trigger is based on losses experienced by the broader market, with the reinsurer indicating that it will cover the ceding insurer’s losses if the market experiences $15 million in losses.

The attachment point—the point at which the insurer will first pay—is set at $10,000. If the market experiences $20 million in losses, the reinsurer will cover the ceding insurer’s losses in excess of $10,000.

What Should Franchisors Consider?

Firstly, franchisors should ensure they have franchise insurance policies in place. This will help protect the business in case of unforeseen circumstances in each location.

The main policies that protect franchisors include:

  • Errors and omissions insurance
  • Management liability insurance
  • Employment practices liability insurance

What is a Franchise Insurance Plan?

The best franchisors insurance considerations are to outline what coverage you need depending on your business activities in the franchise contracts. These contracts are also known as Franchise Disclosure Documents (FDD).

Most business activities are covered by the required franchise insurance policies, but some important policies are left out. As a result, franchisees should investigate their policies to see what’s covered and where extra coverage is needed.

After that, your next step is to create your franchise insurance plan. This plan will ensure all insurance required in the FDD is present as well as any other coverage you need.

What Types of Franchise Insurance Does a Franchisor Need?

Now that you understand what you need to look for in your insurance plan, we will define the required insurance for franchises.

Below are the five most common risks and the insurance needed for each one.

1. Bringing Clients in or Sending Employees Out

If a franchise invites customers in or sends employees out to interact with clients, public liability insurance is important.

2. Worker’s Safety

No matter the type of franchise, there’s a chance of injured and sick staff. Workers’ compensation insurance protects both the franchise and employees from workplace injuries or illnesses.

3. Product Liability

Franchises that sell physical products must ensure they have protection from lawsuits caused by injury due to products. With product liability insurance, franchisors can assure their business has protection from these claims.

4. Property Insurance

If a franchise owns or rents a property, it’s important to ensure policies are in place to pay for damage to the property. Commercial property insurance can assure this coverage.

5. Auto Insurance

Finally, if vehicles are part of a franchise’s operations, commercial car insurance needs to be part of the insurance plan.

Keep Track of Franchise Insurance Policies

Now that you have a clear picture of the insurance coverage you need, the final step is to make sure all the policies are in compliance. The difficult part of this is keeping track of multiple policies.

With SmartCompliance, franchises can upload and track the required certificates of insurance (COIs) for each insurance policy in just one click. Get started today with a free demo to see how we will help your business stay in compliance.

How do Insurance Franchises Work?

An insurance franchise can be a lucrative business to buy. People will always need insurance, for a host of things, and somebody must provide that insurance. Why not you?

Is it because you don’t know how an insurance franchise works? Don’t worry, Be The Boss is here to help! This article explains how insurance franchises work.

How Insurance Works

You pay somebody a set amount, usually a monthly premium, to ensure your health, your car, your house, or any number of other things. Professional athletes sometimes insure parts of their body, singers ensure their voices, art galleries insure paintings, and on and on.

If any of these things become damaged or stolen, your insurance company will pay to have it (or you) repaired or reimburse you the value of the stolen item.

How Franchises Work

All businesses are looking to grow. Once you have mastered a single location and are making a good profit, the impulse is to open another location. Most people understand franchising best through the lens of food restaurants.

They have really mastered the franchising game. You see, once you start to expand to two, three, or ten locations, it becomes unwieldy to manage all by yourself.

By selling the rights to individual locations to franchisees, you can expand your business more quickly with less work for you. Franchising is efficient at allowing businesses to increase market shares.

Insurance Franchises

It’s funny how most people understand insurance and franchises but are taken aback at the thought of an insurance franchise. Insurance franchises operate much like any other type of franchise.

As the owner of an insurance franchise, you would be tasked with issuing as many policies to as many customers as possible within your catchment area.

All good insurance franchises ensure that each franchisee has a protected territory so that different locations don’t eat into each other’s business.

Find Your Lane

As an insurance franchise owner, you could be issuing auto insurance, health insurance, home insurance, a combination of those, or any number of other types of insurance.

It’s up to you to pick the franchise that you think offers the best types of insurance policies for the people in your area. You can choose to specialize or generalize. You can also try to find a niche market.

Some insurance franchises find success by casting as wide a net as possible in order to get new customers while other insurance franchises find success by targeting specific demographics and converting a higher percentage of them into customers.

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