Does Your Franchise Need Insurance?
Everyone's suing everyone these days and everyone's buying insurance policies to cover the costs of litigation. Well almost everyone. It turns out there was one market underserved by the legal insurance industry, but those days may be over.
One insurance brokerage based in Los Angeles has begun selling insurance policies that cover franchise chains facing litigation, and the company's owner thinks this previously untapped market is "going to be a gold mine." This revelation may have franchise owners wondering if they need litigation insurance.
The Risk
Franchiser's face lawsuits from three main fronts:
- Investors suing the franchise for misconduct, misreporting, or misappropriation of funds;
- Franchisees suing the franchise over contract, production, or accounting disputes; or
- Customers or employees suing a franchisee store and dragging the franchise into the litigation.
Considering, as Bloomberg Business notes, that "new regulations have arguably made it easier to sue franchisers and tort lawyers are building class actions," franchises are facing higher potential court costs than ever before. Hence the need for consolidated and comprehensive litigation insurance policies.
The Coverage
But these policies aren't for everyone. Peter Taffae of Executive Perils notes that his policies are targeting at chains with less than 200 stores (most franchises have less than 50 locations) and those with a higher percentage of corporate-owned stores. Taffae told Bloomberg a small chain could get a $1 million policy for around $12,000 a year.
All companies should carry some kind of business insurance policy, and while many policies once focused on property, liability, and workers' compensation issues, newer policies that cover the costs of litigation are becoming more available and more popular. Whether you need an insurance policy for lawsuits will depend on assessing your risk of litigation and the probable costs, and finding a policy that fits your franchise's budget.
Deciding on the right insurance policy can seem impossible, but an experienced business lawyer could help you navigate the process.
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Related Resources:
- Browse Business & Commercial Lawyers by Location (FindLaw Directory)
- 5 Types of Insurance Your Small Business May Need (FindLaw's Free Enterprise)
- Buying a Franchise: 3 Things You Need to Know (FindLaw's Free Enterprise)
- How to Draft a Business Franchise Agreement (FindLaw's Free Enterprise)