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Management Liability Insurance for Franchisors: Important Considerations

Whether you’re a business owner exploring the opportunity to expand through a franchise model, or you’re an existing franchisor with one or more sites already established, insurance is a critical piece of protection to consider. 

Whether you’re a business owner exploring the opportunity to expand through a franchise model, or you’re an existing franchisor with one or more sites already established, insurance is a critical piece of protection to consider. 

When first establishing your franchise system, you no doubt sought out professional advice concerning the legal, accounting, and financial risks associated with your new business venture, but did you also factor in insurance cover such as Management Liability Insurance?

To understand how Management Liability Insurance can help franchisors to manage risk, we first need to unpack what causes franchisors to fail.

What Causes a Franchise to Fail?

While the franchise model has countless benefits, franchise systems, like any business, can fail. This can be caused by one or more of the following internal and external factors: 

  • Management inexperience 
  • Picking the wrong location 
  • Inadequate estimation of costs (including set-up and fit-out costs) 
  • Negative macro and market trends (such as COVID-19) 
  • Other uncontrollable factors (including global supply chain constraints) 

In situations where a franchise fails, it is not uncommon for a franchisee to claim the franchisor misrepresented the franchise opportunity. For this reason, franchisors need to be careful about the information provided to prospective franchisees, particularly in relation to the potential financial performance of the franchise business. 

Assuming Fault for a Failed Franchise 

Franchise Agreements can be complex. It is important that franchisees obtain independent legal advice on the terms of the Franchise Agreement and related documents such as the Franchisor’s Disclosure Document.  If franchisees do not obtain advice from an experienced franchise lawyer, they may sign a Franchise Agreement without having an adequate understanding of the documents. This increases the risk of litigation against a franchisor in circumstances where the franchise fails. 

In a civil case, a plaintiff has the option to only name the franchisor’s entity. In some instances, the plaintiff can also seek to name the directors of a franchisor’s business. Any court case of this nature is an expensive process for both parties involved (with the issue only further compounded by the increase of litigation firms offering ‘no-win, no-fee’ solutions to plaintiffs). 

Management Liability Insurance is a critical component of a franchise business model as it provides cover for unfortunate scenarios just like this one. 

How Does Management Liability Insurance Help Franchisors? 

When a franchisor chooses to take out Management Liability Insurance, the policy provides defence costs that may arise from civil actions, as well as coverage for the directors and officers of a company. Some policies also allow for coverage to be extended to former directors within a certain time frame of their departure from a company. 

Franchisors as a whole are considered more at risk of civil action by insurers due to the dual factors of no-win, no-fee litigation firms, and the complexity of the contracts entered into between a franchisor and franchisee. So, whilst your contracts may be iron-clad, your due diligence spotless and your disclosures crystal clear, it’s important to note that any defence against a case is automatically going to incur costs.

What are the Benefits of Management Liability Insurance? 

Purchasing a Management Liability policy equips franchisors with peace of mind and relieves the financial strain associated with retaining and paying a lawyer in a civil case, which can easily blow out into tens of thousands of dollars – depending on the complexity of the dispute. 

When you take out Management Liability Insurance, your insurers will appoint their own panel of lawyers to represent your best interests, negotiate on your behalf, achieve an optimal outcome in a civil case, and alleviate the added headache of enduring a stressful court case. 

In addition to these benefits, franchisors should also consider the following benefits: 

  • Protection against a range of risks and substantiated claims 
  • Tax audit to cover the costs of your accountant assisting the ATO during an audit 
  • Employment practices liability to also protect against cases (including allegations) of unfair dismissal and bullying 
  • Crime cover to cover theft by employees 
  • Payments for your attendance at court to give evidence 

Knowing that the average cost of a junior lawyer in Australia is between $200-250 an hour, and with estimates of an average civil case length being between 3 to 18 months to reach a conclusion, most Management Liability policies pay for themselves quite quickly if they are implemented.

With the many benefits, complexities, and risks associated with the franchising business model, it’s important that you take out the right insurance policy to protect your business and its assets. 

Our BlueRock business insurance advisors are best placed to provide you with leading expert advice to protect you and your franchise against the unexpected. To future-proof your franchise, get in touch with our team today for a free consultation

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