What insurance coverage should every franchisee be required to carry?

Most franchisors answer that question with a template.

They copy a section from another FDD, drop in a few limits, mention “general liability,” “property,” maybe “auto,” and call it a day. It looks official. It sounds legal. It feels sufficient.

Until something goes wrong.

A roof leak that ruins a build-out. 

A vehicle accident that kills someone. 

A fryer fire that shuts down a restaurant for 14 months. 

A cyber scam that drains $50,000. 

A harassment claim that names the franchisor as a co-defendant.

That’s when everyone suddenly discovers that “insurance requirements” aren’t administrative.

They’re operational. They’re financial. And if they’re written poorly, they’re dangerous.

This isn’t about being “technically compliant.” It’s about whether your system survives bad days.

Key takeaways

Before we go deep, here’s the big picture. Every franchisor should walk away with these truths burned into their brain:

• Insurance requirements are not legal boilerplate. They are the financial blueprint for how your system survives real-world consequences of the franchisee’s operations.

  
  

• There is no universal coverage list. The right requirements depend entirely on operational exposure by industry: home services, automotive, QSR, retail, health and beauty, etc.

  
  

• Vague requirements (“GL $1M/$2M,” “full replacement cost,” “per state workers’ comp laws”) are worse than no requirements. They guarantee franchisees buy the wrong policies and leave franchisors exposed.

  
  

• The contract triggers the coverage. If your FDD and Franchise Agreement don’t clearly require specific forms, endorsements, limits, and clauses, the carrier will not extend those protections to you.

  
  

• Certain coverages are non-negotiable across most systems: correctly structured general liability, properly benchmarked property and business interruption, workers’ compensation (regardless of state law), commercial auto and non-owned auto, cyber, and EPLI with the right extensions.

  
  

Everything else flows from one core idea: your insurance requirements must be built around what your franchisees actually do, not around what everyone else’s FDD says.

Why everything starts with operational exposure

If you strip all the complexity away, insurance is just one thing: a way to finance the consequences of what your franchisees do all day.

Operational exposure is the work itself.

Are they installing fences? On roofs? Cleaning vehicles? Serving food? Grooming pets? Repairing transmissions? Running med-spa treatments? Coloring hair? Restoring flooded basements?

Operational risk is what can go wrong because of that work.

Damage to a car during detailing. A plumbing job that leads to water damage in a home. A roof that leaks after a storm. A fryer burn. A dog bite. A slip-and-fall. A data breach. An ADA lawsuit. An accusation of harassment or discrimination.

The insurance consequence is what it costs to fix all of that.

Repairs. Medical bills. Ongoing treatment. Legal defense. Settlements. Lost income. Rebuild costs. Royalty interruption. Data restoration. Digital forensics. Reputation management. Accessibility remediation. HR defense.

If you skip this chain—exposure → risk → consequence—you will write the wrong requirements. It’s guaranteed. You’ll request the right coverage line but the wrong version. You’ll demand the limit but forget the endorsement. You’ll ask for workers’ comp “per state law” and accidentally let franchisees operate with no coverage at all.

Every bad outcome you see around franchise insurance ultimately ties back to this: requirements that were never grounded in how the business actually operates.

General liability is not general liability

General liability is the first line item in almost every FDD. It’s also the most misunderstood.

Most franchisors write some variation of: “Franchisee must maintain general liability insurance with $1,000,000 per occurrence and $2,000,000 aggregate.” 

It feels specific. 

It isn’t. 

You’ve named a line of coverage and a limit. That’s it.

You haven’t said anything about:

• Completed operations

• Ongoing operations

• Products-completed operations aggregate

• Subcontractor exclusions

• Workmanship exclusions

• Damage to work performed

• Endorsements that extend coverage to you as the franchisor

That’s how you end up with a franchisee who “technically” satisfies the FDD but is functionally uninsured for the losses that actually happen in your system.

The home service industry is the easiest place to see this mistake in the wild.

Home services: same line of coverage, completely different reality

Home services are exploding. Plumbing, electrical, roofing, painting, fencing, window cleaning, junk removal, exterior cleaning—dozens of franchise models all clustered under similar NAICS codes.

On paper, they all “need GL.”

In reality:

• A roofing brand lives and dies on completed operations and subcontractor language. Most of its risk shows up after the job is finished.

  
  

• A plumbing brand needs strong protection for water damage and resulting property damage. A small mistake can ruin drywall, flooring, cabinets, and contents.

  
  

• A painting brand needs coverage for overspray, damage to customer property, work in progress, and equipment.

  
  

When the FDD just says “GL $1M/$2M,” agents default to the cheapest policy that hits the limit. That usually means broad exclusions, underpowered completed operations, and a big surprise when a claim comes in and the carrier declines coverage because the wrong form was purchased.

It gets worse when subcontractors enter the picture. A subcontractor exclusion can gut the policy for the exact way the franchisee actually delivers the work. A faulty workmanship exclusion can leave the franchisee and franchisor completely exposed for exactly the type of loss the brand is most likely to experience.

Meanwhile, the franchisor believes they’re protected because “the franchisee has GL.”

On paper, yes. In reality, no.

Automotive: garagekeepers done wrong

Automotive is where franchisors convince themselves they’re being specific and still get it wrong.

They’ll require “general liability and garagekeepers liability,” but never specify what kind of garagekeepers. That’s a problem.

There are two very different versions:

• Direct primary

• Legal liability

  
  

Direct primary means the policy pays regardless of fault when a customer’s vehicle is damaged while in your care, custody, or control. Legal liability means the policy only responds if the franchisee is legally liable and negligence is proven.

Here’s the difference in real life.

A customer drops off a car for detailing. Overnight, a windstorm hits, debris flies, a light pole falls and crushes the trunk. Under a direct primary form, the franchisee’s policy responds, fixes the car, and the customer is made whole.

Under a legal liability form, the adjuster asks one question: Did the franchisee do anything negligent? If not, there’s a strong chance the claim is denied.

Same line item in the FDD: “garagekeepers.” Completely different outcome.

Now add another layer of complexity: some carriers package garagekeepers inside a business auto form instead of alongside GL. Others split it out. If the franchisor doesn’t understand how these forms work and doesn’t specify what’s required, franchisees will buy whatever is cheapest and the brand will be exposed when a high-dollar vehicle is damaged.

Quick service restaurants: simple on the surface, not so simple underneath

For quick service restaurants, general liability often feels “standard.” Slip-and-fall. Foodborne illness. Products liability. That part is fairly consistent.

But franchisors still make the same fundamental mistake: assuming the right protections automatically apply. Additional insured status isn’t automatic. Primary and non-contributory wording doesn’t just activate itself. Waivers of subrogation don’t magically apply because an agent checked a box.

Yes, some policies include these endorsements by default. But here’s the part almost no one understands: those forms will not extend coverage to the franchisor unless the contract requires it. The endorsement may exist — but it sits dormant unless there is a contractual obligation specifically naming the franchisor as an additional insured and requiring primary & non-contributory and waiver of subrogation.

Carriers only extend those protections when the FDD and Franchise Agreement demand them. If your agreements don’t explicitly require additional insured status for ongoing and completed operations, primary and non-contributory wording, and waivers of subrogation, the policy’s built-in forms won’t trigger for you in a claim.

And when the claim hits, your name will be on the lawsuit, but you will not be on the policy.

Property insurance and the tenant-improvement blind spot

Property insurance is often treated like a minor line item: “Franchisee must insure business personal property at full replacement cost.” That feels complete, but it’s not.

You have to define what must be insured and in what amount. The best place to start is Item 7.

Item 7 already outlines the initial investment: equipment, inventory, furniture, fixtures, and everything else the franchisee must buy to open. That might total $100,000. It might be $200,000. In some systems, far more.

If you require them to invest that much in assets, it is irresponsible not to tie your property insurance requirement to that minimum. Otherwise, the franchisee will insure a fraction of it and assume they’re fine because “I checked the replacement cost box.”

And that’s just the movable stuff.

The biggest blind spot is tenant improvements and betterments.

The build-out. The walls, floors, fixtures, plumbing, electrical, HVAC modifications, and custom work that turn vanilla space into your brand. In many concepts, the build-out is the largest investment outside of the franchise fee.

Over and over, when we review franchisee policies, we see the same thing: tenant improvements are not insured. At all. If the location burns down, the landlord’s policy covers the shell. The franchisee loses the entire build-out. The lease usually makes that their responsibility, not the landlord’s. The franchisor loses a unit, and the franchisee likely cannot afford to reopen.

And again, it all ties back to the requirement. If the FDD had clearly required coverage for tenant improvements, tied to realistic build-out benchmarks, there’s a good chance the franchisee’s policy would have been written correctly. If you never mention it, the odds drop dramatically.

Business interruption: often too much where it doesn’t matter and too little where it does

Business interruption is one of those coverages everyone has heard of and almost no one structures correctly in franchise systems.

For brick-and-mortar locations, it’s vital. If a restaurant burns down, you don’t reopen in a few weeks. There’s investigation, abatement, permitting, reconstruction, inspections, and re-hiring. Small footprint locations might realistically be back in eight to twelve months. Larger spaces can easily stretch to sixteen or eighteen.

If your requirement is “business income – actual loss sustained for 12 months,” that looks intelligent on paper. For many brands, it’s not enough in reality. You may have just hard-coded underinsurance into your system.

Then there’s the franchisor’s side of the equation: royalty fees. You do not magically get paid if the franchisee’s location burns down. Unless the BI coverage is specifically written to include franchisor royalties, the carrier won’t pay them.

Most franchise systems never require royalty coverage in business interruption. So when a location burns, the franchisee stops operating, and you lose both the unit and the revenue until they somehow fund a rebuild or walk away.

At the same time, franchisors will turn around and require business interruption for home-based or highly mobile models where it almost never triggers.

Business income coverage generally requires direct physical loss to the insured premises that prevents the business from operating. If the “premises” is a home office and the real work is done from a laptop in the field or in customers’ homes, the franchisee can usually keep working. They can sit at the kitchen table, a coworking space, a coffee shop, wherever.

The actual bottleneck isn’t the office—it’s the equipment.

That’s why BI for mobile or home-based service models, if it’s required at all, should be tied to the time it takes to replace key equipment, not an arbitrary twelve-month period.

If a custom-built rig takes sixty days to replace, it makes sense to ask for a couple of months of BI. If equipment lead times are six months, maybe you size it accordingly. But requiring twelve months actual loss sustained for a business that never truly shuts down due to property damage is just waste and confusion.

Inland marine and equipment: the hidden exposure in service-based models

In many home-service, restoration, and contractor-style franchises, the entire business lives inside a van or truck.

Custom pressure-washing rigs. Extraction systems. Built-in tools. Specialized cleaning systems. Plumbing equipment. Electrical diagnostic gear. Restoration equipment. It’s not hard to end up with $40,000, $80,000, even $150,000 worth of equipment inside a single vehicle.

The average franchisee—and unfortunately, many agents—assume, “It’s attached to the vehicle, so the auto policy covers it.”

It doesn’t.

Auto coverage is for the vehicle. Equipment attached to the vehicle is still business personal property. When that van catches fire, is stolen, or gets totaled, the auto carrier may pay for the van and leave the equipment out of the equation entirely.

That’s what inland marine is for. An equipment floater that:

• Follows the equipment wherever it goes

• Covers it inside the vehicle, at the job, or in transit

• Can be written at replacement cost rather than depreciated value

  
  

Replacement cost is critical. If your system requires franchisees to invest heavily in custom equipment, but they only insure it on an actual cash value basis, a loss years down the road may put them out of business because the payout won’t come close to what they need to rebuild.

If you don’t address inland marine in your FDD, most franchisees will never insure their equipment correctly. And when the loss happens, you will be explaining to them why they can’t afford to reopen—and why your brand just lost a location.

Workers’ compensation: the one place franchisors inexplicably hand control to the state

Here’s where things get truly backward.

For general liability, you’re specific. 

For property, you’re increasingly thoughtful. 

For auto, you at least call out limits. 

But when you get to workers’ compensation, in almost every FDD, you see some version of: 

“Workers’ compensation as required by state law.”

That is an astonishing abdication of judgment.

Workers’ comp is the coverage that responds when someone falls off a roof, slices their hand open, loses a finger in a piece of equipment, burns themselves in a kitchen, or suffers a crush injury in an automotive bay. It pays for medical care, lost wages, and disability.

And you’re leaving that entirely to the state.

States have wildly different thresholds. Some require it with one employee. Some with four. Some have odd exemptions. Texas doesn’t require it at all. In Texas, a significant percentage of business owners choose not to carry workers’ comp.

Not carrying workers’ comp doesn’t mean no one is responsible. It just means there’s no policy. The employer is still liable for injuries. If there’s no insurance, injured employees will go looking for someone else to pay. And in a franchise context, that “someone else” often includes the franchisor.

This is precisely where joint employer arguments show up. The franchisee doesn’t have coverage. The injury is severe. The plaintiff’s attorney looks up the food chain. The franchisor wrote the manuals. The franchisor dictated the systems. The franchisor benefited financially. Now the franchisor is being named in the suit.

You can’t control how regulators define joint employer. You can’t control who plaintiffs sue. But you can control whether your franchisees have workers’ comp.

If you require workers’ compensation regardless of state law, and you require appropriate employers’ liability limits (for example, $1,000,000) plus waivers of subrogation in your favor, you go a long way toward insulating your brand from catastrophic employment-injury fallout.

If you let the state decide, you’re choosing to accept whatever gaps, exemptions, and opt-outs that state has baked into its system.

Commercial auto: obvious exposure and hidden exposure

Commercial auto is easy to overlook because it seems straightforward.

If the franchisee owns or leases vehicles for business use, they need commercial auto. Not personal auto with a “yeah, it’s probably fine” wink. Personal auto is rarely designed to cover business use properly, and it absolutely does not meet the needs of a professional franchise system that depends on vehicles to deliver services.

At minimum, franchisees with owned vehicles should carry a commercial auto policy with a combined single limit of at least $1,000,000. Split limits like 100/300/100 are too small for modern claims and shouldn’t be acceptable in a franchise context. The difference between a hundred thousand and a million in an auto claim can be the difference between “we had a bad accident” and “we lost everything.”

You should also strongly encourage, if not require, uninsured and underinsured motorist coverage. Many drivers on the road are underinsured or uninsured entirely. If your franchisees or their employees are hit and the other driver doesn’t carry adequate coverage, the only way they’re made whole is through UM/UIM. You’re asking people to operate branded vehicles on your behalf. Protecting them when they’re not at fault is the right thing to do.

That covers the obvious side of auto. The less obvious side is hired and non-owned auto—one of the most underappreciated exposures in franchising.

Non-owned auto comes into play when employees use their personal vehicles for business errands. That doesn’t just mean formal delivery or on-site service. It’s the assistant manager who runs to the bank. The employee who picks up food for the team. The staff member who drives to Home Depot for emergency supplies. The field supervisor using their own car to visit job sites.

Every concept has this exposure: trades, QSR, automotive, retail, health and beauty, fitness, senior care, pet care, and more.

When a staff member runs to grab Starbucks for the team and hits someone, their personal auto policy is primary. But if the loss is large enough to pierce their limits, plaintiffs will absolutely go after the business. Hired and non-owned auto is what sits on top of that. For a relatively low premium, it provides a million dollars of liability protection for the business when employees use personal cars on company time.

Franchisors sometimes resist requiring it because “it’s one more cost.” In reality, it’s a tiny cost relative to the exposure it covers. You’re leveraging a small additional premium to finance catastrophic-level risk.

Again, the same theme shows up: if you don’t require HNOA, most franchisees will never think about it, and you will only realize the gap exists after an accident.

Across both owned and non-owned auto, the same rule applies as with GL: you should be requiring the right endorsements—additional insured, primary and non-contributory where appropriate, and waivers of subrogation—whenever it’s feasible to do so.

Cyber liability: “we use a third-party vendor, so we’re fine” is a lie

Cyber is where franchisees are the most naïve and franchisors are the most exposed.

Almost every conversation about cyber starts the same way: “We use a third-party POS. We use a third-party CRM. We’re in the cloud. Don’t they cover that?”

The answer is almost always no.

If you actually read your contracts with your POS provider, CRM vendor, marketing platform, or scheduling system, you will see the reality in black and white. They are responsible for their own systems. They do everything they can to limit their liability. They almost always disclaim responsibility for your customers’ data.

If you sign a master services agreement at the franchisor level, they may owe you something if they’re breached. But the individual franchisee’s customer data—names, emails, phone numbers, addresses, appointment history, credit card tokens, loyalty accounts—that’s on the franchisee.

And when something goes wrong, it’s the franchisee who gets the angry phone calls, bad reviews, local news attention, and legal demand letters. If the event is large enough, it rolls uphill and lands on you too.

That’s why cyber liability needs to be in your FDD as a requirement, not an optional “nice to have.” Bolt-on cyber endorsements on GL or property policies are almost always inadequate. They come with tiny limits and narrow triggers that don’t match how modern cyber incidents actually work.

Franchisees should be carrying a stand-alone cyber policy with a realistic minimum limit—$250,000 is a reasonable floor for many small operators—and a broad set of insuring agreements. That includes things like network and security liability, privacy liability, extortion and ransomware, data restoration, business interruption from cyber events, and regulatory coverage.

And then there’s cyber crime.

This is where the real world shows up. Social engineering, funds transfer fraud, invoice manipulation, phishing, fake vendor instructions—this is how most small businesses actually lose money.

We’ve experienced it ourselves. Someone impersonated me, emailed our accounting address, and convinced our bookkeeper to add a fraudulent payee tied to my bank. Eight payments of $49,000 were queued up before we shut it down. That’s social engineering. It’s not theoretical. It’s not “maybe someday.” It’s now.

Most franchisees do not have $50,000, $100,000, or $200,000 sitting idle to absorb a sophisticated scam. A single incident like that can cripple them—and by extension, damage your brand.

A good cyber policy either includes cyber crime coverage or is paired with a crime policy that does. If you don’t require it, your franchisees will almost always skip it, and when the scam email lands in their inbox—and it will—they’ll be on their own.

EPLI: your first real line of defense against joint employer exposure

Joint employer is one of those phrases that makes franchisors nervous for good reason. Regulators, plaintiffs’ attorneys, and courts have all taken turns shaping and reshaping what it means.

You can’t fix that with wordsmithing or wishful thinking. But you can do something very practical: require Employment Practices Liability Insurance (EPLI) at the unit level and require it to be structured in a way that can protect you when, not if, employment-related claims show up.

EPLI exists to defend the franchisee against claims like sexual harassment, wrongful termination, discrimination, retaliation, hostile work environment, and certain wage and hour allegations. In some cases, it helps with ADA-related defense as well.

These claims live everywhere. QSRs. Retail. Home services. Health and beauty. Fitness. Senior care. Any business that hires people and interacts with the public is exposed.

At a minimum, franchisees should be carrying a meaningful limit. For many concepts, a $250,000 limit is a reasonable floor. For quick service restaurants—with their high turnover, younger workforce, and intense customer interaction—$500,000 is more realistic.

But the details matter.

One of the most common mistakes is franchisees purchasing a cheap EPLI endorsement bolted onto a BOP. It looks like a bargain. The problem is that most of those endorsements do not include third-party coverage.

Third-party EPLI extends coverage to claims made by customers, vendors, and other non-employees alleging discrimination, harassment, or similar issues. That’s a huge piece of the modern risk landscape. You want your franchisees protected when a customer, delivery driver, or vendor makes an accusation.

The other critical piece almost no one requires—but you should—is co-defendant coverage or a specific franchisor endorsement. These provisions are what allow the franchisee’s EPLI policy to defend both the franchisee and franchisor when both are named in an employment claim.

That’s how you turn EPLI from “just another policy the franchisee has to buy” into a real risk-transfer tool for your system.

You are not going to stop plaintiffs from naming the franchisor. But you can engineer your requirements so that when you are named, the franchisee’s policy steps in to defend both of you.

It won’t pay to physically fix an ADA ramp or remediate every website accessibility issue. But it can pay for defense—which is usually the most painful part financially for smaller operators.

The infinite list of specialized coverages

Even after all of this, we’re barely scratching the surface. There are coverages that are highly specific by industry:

• Contractors’ pollution and contractors’ E&O in the construction and remediation space

• Pet professional liability and animal bailee coverage in pet care and grooming

• Bailee coverage for restoration franchises who take custody of customer contents

• Medical malpractice or beautician’s professional liability in med-spa, wellness, and health and beauty

• Garagekeepers and related coverages in automotive

• Liquor liability where alcohol is involved

  
  

The list goes on. It’s endless because exposures are endless.

That’s the point.

There is no complete, static master list of required coverages that fits every brand. There is only the discipline of mapping your operational exposure to your insurance requirements and refusing to accept vague, generic language where specificity is needed.

So what do you actually do with all of this?

If you’re a franchisor, this can feel overwhelming. It shouldn’t paralyze you. It should clarify your job.

Your job is not to become an insurance expert. Your job is to stop pretending that insurance requirements are boilerplate and start treating them like an essential part of your risk and brand strategy.

That means a few very practical things:

You anchor every requirement in operational exposure. Home services, automotive, QSR, retail, health and beauty, restoration, pet care—each of these has its own risk profile. You stop thinking in generic terms and start thinking in terms of real-world claims and consequences.

You tighten your core requirements where they matter most. General liability with the right aggregates, exclusions, and endorsements. Property tied to Item 7 and explicitly covering tenant improvements. Business interruption sized to real downtime and, where appropriate, including your royalties. Workers’ compensation required regardless of state law.

Commercial auto with meaningful limits and non-owned auto for incidental use. Cyber that actually responds to modern incidents. EPLI with third-party and co-defendant protection.

You stop letting the state, the cheapest agent, or a fifteen-year-old template decide how your system finances risk.

And you do not try to solve this alone.

You work with an insurance professional who understands both your industry and franchising—someone who knows how claims actually unfold, how policy language actually applies, and how FDD and franchise agreement language has to be written so coverage is triggered when it matters.

Because at the end of the day, this isn’t about being strict or “picky” with your franchisees. It’s about respecting the investment they’ve made and the brand you’re building. The requirements you write today are the safety net everyone will rely on when something goes wrong tomorrow.

What to do next

If you’re looking at your current insurance requirements now and wondering how many gaps are baked in, that’s a good instinct. It means you’re paying attention.

If you want help evaluating whether your FDD and franchise agreement are actually protecting your system—or just giving you a false sense of security—reach out.

Contact us: hello@rikor.io

We can walk through:

• What your franchisees actually do

• How your current insurance requirements line up with that reality

• Where the biggest gaps and exposures are

• How to re-engineer your requirements so they protect both franchisees and you as the franchisor

You don’t need more boilerplate. 

You need requirements that match how your brand really operates.