​Why is an item 7 review Important?

Accurate Cost Estimation:

Item 7 often includes estimates for initial insurance costs. Reviewing this ensures that the franchisee budgets appropriately for mandatory insurance policies like General Liability, Workers’ Compensation, Auto, and Property insurance.
 

Understanding Obligations:

The insurance section may specify minimum coverage limits, required types of insurance, and whether the franchisor needs to be named as an additional insured. Missing these requirements can result in non-compliance with the franchise agreement.
 

Avoiding Hidden Costs:

Insurance costs can vary based on factors like location, business size, and industry risks. A review helps identify any costs that may not have been fully accounted for in the estimated range.
 

Carrier Audit Preparation:

Insurance coverage often plays a role in carrier audits. Franchisees should be aware of how these audits could impact their operations and premiums.
 

How Often Should Insurance Be Reviewed?
 

Before Signing the Franchise Agreement:

Conduct an in-depth review of the insurance requirements outlined in Item 7 and other sections of the FDD. This ensures clarity on the initial investment and compliance expectations.
 

Annually:

Insurance needs can change based on business growth, regulatory updates, or franchisor revisions. An annual review ensures that coverage limits are still adequate and policies remain compliant with franchisor standards.
 

Upon Policy Renewal:

Review the insurance requirements and actual policies when renewing coverage. This allows franchisees to adjust their policies if requirements or risk exposures have changed.
 

During Operational Changes:

Any significant operational change, such as adding new services, hiring more employees, or expanding locations, should trigger an insurance review.
 

Franchisor Updates:

Stay alert for updates from the franchisor, which might include adjustments to insurance standards or recommended providers.
 

Key Actions for Franchisees
 

Consult an Insurance Advisor: Work with a professional to ensure the insurance policies meet the franchisor's requirements while adequately protecting the business.
 

Maintain Documentation: Keep certificates of insurance (COIs) and related documents up-to-date and easily accessible for audits or franchisor reviews.
 

Plan for Increases: Be prepared for potential premium changes as the business grows or as risks evolve within the industry.
 

By reviewing insurance requirements annually and aligning coverage with the franchise's operational needs, franchisees can avoid unexpected expenses, ensure compliance, and protect their business from financial risks.