Why franchisors must take up professional indemnity insurance

The $146bn franchise sector needs to be adequately insured against increasing professional indemnity exposure, according to Solution Underwriting.

A franchisor is a person or company that allows a third party – the franchisee – to use a company’s overall rights and trademarks to conduct a business. In Australia, the franchise sector is part of an emerging market and includes retail, beauty services, food services, automotive services, and personal services.

Solution Underwriting said franchisors have a very clear professional indemnity exposure whenever they give advice or consult in order to:

• select qualified franchisees
• enforce system standards in all company-owned and franchised locations
• provide franchisees with training for use with their teams
• develop and enforce advertising, promotion, and merchandising standards to increase customer traffic for the franchisee

The Victoria-based underwriter also said there are two common areas where litigation occurs:

• When one party to the franchise agreement believes the other is not doing whatever they agreed to do under the terms of the agreement
• When either party believes the other is conducting itself in some unanticipated manner that is injurious to its business

One unique component to underwriting a franchisor account is looking at the franchisors’ terms-of-service agreement, which they provide to potential franchisees.

“The terms-of-service agreement usually highlights what professional services the franchisor is offering to its franchisees,” Solution Underwriting said. “The language needs to be clear and it needs to avoid any ‘promises’ to yield certain amount of income. Most terms-of-service agreements are written to provide a fair and equitable playing field for both franchisor and franchisee.”