What Franchise Agreements Typically Require
The requirements vary by brand but the categories are consistent. Commercial general liability at a specified per occurrence and aggregate limit, with the franchisor and often its affiliates named as additional insured, frequently on a primary and non contributory basis and with a waiver of subrogation. Liquor liability where alcohol is served, often at the same limit as general liability. Commercial property coverage at replacement cost, usually with specified causes of loss, often including named storm and sometimes flood and earthquake where exposed, with a maximum deductible stated. Business interruption, sometimes with a specified indemnity period, and in many agreements a requirement that the coverage include the continuing franchise fees the owner owes the brand even while closed. Beyond that: workers compensation at statutory limits with employers liability, commercial auto where the hotel operates vehicles including shuttles, umbrella or excess liability at a specified limit, employment practices liability in many current agreements, cyber liability in most current agreements, and crime coverage. Builders risk during renovation or a property improvement plan, with the brand named. And increasingly, specific requirements regarding abuse or assault coverage and human trafficking related exposures. Two items that catch owners. The named storm or wind deductible maximum, which in coastal markets can be difficult and expensive to satisfy, and the carrier rating requirement, which can conflict with placements in the surplus lines market where much coastal hospitality property is written.
- General liability and liquor liability at specified limits with franchisor additional insured status
- Property at replacement cost with maximum deductible limits, including named storm
- Business interruption often required to include continuing franchise fees
- Carrier rating requirements can conflict with necessary surplus lines placements
The Requirements That Are Hard to Meet
Three categories regularly create real friction, and all three are better addressed before signing or before renewal than after a notice arrives. Named storm deductibles are first. Brands typically cap the deductible at a stated percentage or dollar amount. In hard coastal property markets, carriers may be unwilling to write at that attachment, or the premium to buy down the deductible is substantial. Deductible buy down coverage exists and is worth pricing, and brands will sometimes grant a waiver, but the waiver has to be requested with documentation of market conditions rather than assumed. Carrier ratings are second. Requirements commonly specify a minimum financial rating from a recognized rating agency. Property placements that rely on a layered program with multiple participants, or on carriers not rated by the specified agency, can fall outside the requirement even though the program is sound. This is generally resolvable with brand consent, and the resolution should be documented in writing and kept with the franchise file. Additional insured status on certain policies is third. Brands sometimes request additional insured status on coverages where it is not customarily provided, such as employment practices liability or workers compensation. The productive response is to negotiate to what is available: evidence of coverage, waiver of subrogation where it can be provided, and notice of cancellation. Underlying all three: raise the conflict before it becomes a compliance notice. A brand that is told in advance that the property market will not meet a deductible requirement, with support, usually works with the owner. A brand that discovers non compliance through a certificate audit starts from a different posture.
- Named storm deductible caps can be difficult in hard coastal markets, and buy down coverage is worth pricing
- Carrier rating requirements can exclude sound layered or surplus lines programs
- Additional insured status is not available on every coverage brands request it for
- Raise conflicts proactively with documentation rather than waiting for a compliance notice
Who Is Covered: Owner, Operator, and Franchisor
Hotels are frequently structured with an owner entity, a separate management company, and the franchisor, and the insurance has to match that structure. The named insured schedule should include every entity with an interest: the property owning entity, the operating or tenant entity if there is one, the management company where the management agreement requires it, and any related entities in the ownership chain. Omitting one is common and consequential, because an entity not named may have no coverage for a claim brought against it. The franchisor is typically an additional insured for liability arising out of the operation of the hotel, not for its own independent acts. That is the standard and appropriate scope. Where a brand requests broader status, it is worth understanding what is being requested, because broad form additional insured language can expand the owner's policy to respond to the franchisor's own conduct. The management agreement adds a parallel set of requirements, and those requirements and the franchise requirements do not always agree. Where they differ, the program needs to satisfy the more demanding of the two, and the owner should know which that is for each category. Management agreements also commonly address who procures the insurance, whose name it is in, how premium is allocated, and who controls claims, and those provisions need to be read alongside the insurance rather than filed separately. Finally, lender requirements form a third layer with its own specifications, often the most prescriptive of the three regarding property coverage, flood, and business interruption.
- Name every entity in the ownership and operating chain, since an unnamed entity may be uncovered
- Franchisor additional insured status is normally for liability arising from hotel operations
- Franchise, management, and lender requirements differ, so build to the most demanding of each
- Management agreements also govern who procures coverage and who controls claims
Building a Compliance Process
The administrative discipline here is unglamorous and prevents nearly all of the problems. Build a single compliance matrix listing, for each requirement source, franchise agreement, management agreement, and loan documents, the required coverage, limit, endorsement, deductible maximum, and carrier rating standard. Note which requirement is most demanding in each row. That one page is the specification your program is built to. Then handle certificates deliberately. Issue them to each requirement holder at binding and at every renewal, before expiration rather than after a request. Keep copies in the franchise file. Where a requirement is waived or modified by consent, keep the written consent in the same file, because the person who granted it will not be the person who audits it three years later. Review the matrix at each renewal and whenever a document changes. Franchise agreements get amended, brands update insurance requirements through operating standards rather than through agreement amendments in some cases, and loan documents change on refinance. An owner who checks only at renewal can be out of compliance for months because the brand updated a standard. Finally, build the review into transactions. A property improvement plan triggers builders risk requirements. A refinance brings new lender specifications. A sale brings a diligence review where non compliance is discovered by a buyer, which is the most expensive time to find it.
- Maintain one matrix of franchise, management, and lender requirements with the most demanding noted
- Issue certificates proactively at binding and renewal, and keep them in the franchise file
- Keep written waivers and consents on file, since auditors change
- Review on renewal, on document changes, and before any renovation, refinance, or sale
Frequently Asked Questions
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This article is for general information and is not a substitute for policy language or professional advice.