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The (Not So) New Franchisor Insurance Trap

Posted on Date: Feb 19, 2016

The (Not So) New Franchisor Insurance Trap

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As we’ve discussed in blogs past, not every franchisor is happy with just earning a monthly percentage of profits from its franchisees. Instead, many franchisors actually turn their franchisees into a separate revenue stream and use all kinds of tricks – mostly allowed in today’s extremely franchisor-friendly franchise agreements – to squeeze as much money out of their franchisees as possible. One of their most popular strategies is to force franchisees to purchase specific supplies even if those items don’t directly impact the company’s brand in exchange for rebates/commission (aka kickbacks) from the chosen supplier. These supplies can be anything from floor cleaning materials to credit card processing software. One (not so) new version of this trap is to force franchisees to purchase a particular insurance product.

Understanding the Franchisor Insurance Trap

Insurance is as necessary to a business as pens, paperclips, and a working phone number. Most franchisees must purchase liability insurance, workers’ compensation, disability insurance, possibly health insurance and more. Since franchisees already need to purchase insurance, franchisors have the opportunity to use their large numbers to negotiate lower-cost group insurance policies that can benefit all of their franchisees. Some franchisors do make an effort to support their franchisees in this way.

Other franchisors, however, only see a chance to drain more money out of their franchisees.

The AAFD has seen real cases of franchisors mandating that their franchisees obtain certain types of insurance with special riders that are so specific that the franchisees are forced to buy one specific policy from the same insurance provider. Instead of enjoying group discounts, these policies are exorbitantly expensive. You can bet that the franchisor earns a commission from the insurance company for every new franchisee customer.

How to Fight the Franchisor Insurance Trap

The best way to avoid falling into the franchisor insurance trap is to watch where you are going! Review your franchise agreement in its entirety and make sure you have a franchise attorney look at it as well. The agreement may specify what type of insurance you need to purchase before you open your doors. How specific are the requirements? Can you choose your policy among different providers allowing you to shop around and get the best deal possible, or is the mandated policy only available through a single carrier?

If you see the trap, you can at least address it with the franchisor, though you will likely either need to accept the expensive policy or go your separate ways. At least you will have a choice though! That’s far better than recognizing the trap after it has already sprung!

At the AAFD, we continue to fight for greater fairness in Franchise Agreements and more power on the part of franchisees. You can review our Fair Franchising Standards to learn more about our vision for a better Franchisor/Franchisee relationship. If you need help reviewing a franchise agreement, consider using our Franchisee LegaLineSM to view a list of AAFD-vetted and highly experienced franchise attorneys.

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