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InsuranceConsiderationsforFranchisors
DavidC.Rosenbaum,PartnerFaskenMartineauDuMoulinLLP
JenniferTyrwhittGory,B.Mus.ED.,C.A.I.B.,President
InsurancePortfolioInc.
MartaJankovic,AssociateSotosLLP
Disclaimer• Allinformationandopinionscontainedinthispresentationareforgeneralinformationpurposesonlyanddonotconstitutelegaloranyothertypeofprofessionaladvice.Thecontentofthispresentationisnotintendedtobeasubstituteforspecificadvicepreparedonthebasisofanunderstandingofspecificfacts.Anyrelianceonthisinformationisatthereader’sownrisk.
Question1• Whatinsuranceproductsarecurrentlyavailabletofranchisorsaboveandbeyondthestandarddirectorsandofficersliabilityinsurance?
FranchisorAmendatory
• AIGInsuranceCompanyoffersanamendatorywhichamendsAIG’sPrivateCompanyDirectors&OfficersLiabilitywording.Thisiscalledafranchisoramendatoryendorsement.
• AIGInsuranceCompanyofCanadaisratedA(Excellent)asatNovember2015,withAMBest,OutlookStable,andhasbeenratedA(Excellent)sinceatleast2010.
• PolicyisdesignedforregisteredCanadianfranchisorbusinessesoperatinginCanada.
• Directors&OfficersPoliciescoverwrongfulactsmeaning“anyactualorallegedbreachofduty,neglect,error,misstatement,misleadingstatement,omissionoract….”
FranchisorAmendatory(continued)
• HighlightsoftheFranchisorAmendatoryinclude:• CoversArthurWishartActCosts• Lossincurredinconnectionwithaclaimofrescission,orfordamagesformisrepresentation,underorpursuanttotheArthurWishart(FranchiseDisclosure)Actoranysimilarprovincialfranchisedisclosurestatute.
• Carvesbackcoverforbreachofcontract,standardexclusiononDirectors&OfficersLiabilitypolicies.
Question2• Whatlegalissuesdoyouforeseewiththistypeofproduct,andhowmightthoseissuesimpactafranchisor’slitigationstrategy?
LegalIssues• Exposuretorescissionandmisrepresentationclaimsisabigissueforfranchisors
LegalIssues(Continued)
• TypicalD&OpolicyexcludesliabilityforLossinconnectionwithClaimmadeagainstInsuredalleging,arisingoutof,baseduponorattributabletoactualorallegedcontractualliabilityoftheInsuredunderacontract
• Althoughtheexclusionwillnotapplytoliabilitywhichwouldhaveattachedinabsenceofcontract
LegalIssues(Continued)
• ThisexclusionhasbeenusedtodenycoveragetofranchisorsintheU.S.formisrepresentationissues.
• CousinsSubmarines v.FederalInsuranceCo. (Dist.Ct.Wisc.,2013)
• ClaimbyfranchiseesagainstfranchisoranditsofficersanddirectorsformisrepresentationthatenticedthemtoopenCousinsfranchises,breachofthefranchiseagreement,unlawfulrescissionofthefranchiseagreement,andviolationoffranchiselegislation
• Franchisorsettledwithfranchiseesbypayingthem$750,000.
LegalIssues(Continued)
• FranchisorsoughtcoveragefromFederalwhodeniedonbasis,interalia,ofexclusionforcontractualliability
• Courtheldthattheexclusionclausebarredcoverage
LegalIssues(Continued)
• Amongthereasons:Cousins’liabilityformisrepresentationclaimstemmedprimarilyfromthecontractitenteredintowithfranchisees,andrescissionofthecontractwouldfallunderthecontract– Althoughcourtallowedforpossibilitythattoextentliabilitywasbasedonrelianceonmisrepresentationsanddamagespriortoenteringintocontract,suchliabilitywouldexisteveninabsenceofcontractandwouldnotbeexcluded.
LegalIssues(Continued)
• Also:liabilityforclaimunderstatutewasexcluded.Statutesaidpersonwho(e.g.)makesuntruestatementofmaterialfactisliablefordamagestoanypersonwhoreliedonmisrepresentationoruntruestatementinpurchasingfranchise.– Held:sinceliabilityrestsonmisrepresentationsthatinducedfranchiseestoenterintofranchiseagreements,theliabilitystemsfromthecontract
LegalIssues(Continued)
• Whetherclaimunders.6or7ofArthurWishartstatutewouldfallwithinexclusionwoulddependonwordingofexclusion:wouldtheclaimbeheldtobebasedon,arisingfromactualorallegedliabilityundercontract?Orunderstatute?
• HasnotbeentestedinCanada,andwilldependonwordingofpolicy
• ButWisconsincasesuggestssuchclaimcouldfallwithinexclusion
LegalIssues(Continued)
• AmendatoryendorsementrestorescoverageforLossinconnectionwithClaimsmadethatallege,ariseoutoforareattributabletocontractualliabilitywhereClaimisforrescissionordamagesformisrepresentationunderArthurWishartActorsimilarprovinciallegislation
• AlthoughIunderstandavailablelimitsforthisrestoredcoveragearelow
• AndDefenceCostsusuallyareincludedinlimits
LegalIssues(Continued)
• Primafacie amendatoryendorsementshouldmakecoverageavailable(subjecttolimitsandretentions)forClaimsunders.6or7ofArthurWishartAct
• ButmaynotextendcoveragetoothertypesofClaimsthatcouldariseunderstatute,suchas:
• s.3(2)- claimfordamagesforbreachofdutyoffairdealing• s.4(5)- claimfordamagesforinterferingwithfranchiseerightto
associate• Maynotextendcoveragetomisrepresentationclaimsoutsides.7
(misrepresentationindisclosuredocumentorstatementofmaterialchangeorduetofailuretocomplywiths.5)– Althoughsuchclaimsmaynotbeexcluded
Question3• Inadditiontodirectorsandofficers,whodoesfranchisorinsurancetypicallycover?Forexample,areexecutivesandotheremployeescovered?Whataboutfranchisebrokersthatworkonacontractbasisforafranchisor?
WhoisInsured?• Whoiscovered?BroadcoverageisnotjustforDirectors&Officers,butincludes:
• TheExecutiveofanOrganization,employeeofanOrganizationorOutsideEntityExecutive.
• ThefranchisoramendatoryamendsthedefinitionofInsuredPersontoinclude“Franchisor’sAssociate.”
Question4
• Arethereotherindividualsthatfranchisorsshouldbeconcernedabouthavingcovered?
WhoelseisInsured?• CorporatefranchisoroftenalsocoveredunderD&Opolicyforitsown“WrongfulActs”,i.e.,itsactualorallegedbreachofduty,neglect,error,omission,misstatementetc.
• Oftencoverspast,presentandfuturedirectors,executives,employeesetc.
WhoelseisInsured?(Continued)
• Amendatoryendorsementadds“Franchisor’sAssociate”toInsuredPersons(inconnectionwiththefranchisor),butrestrictscoveragetoallegednon-compliancewithstatutorydisclosureobligationorallegedmisrepresentationinadisclosuredocument– Butquaere effectofinsuredvs.insuredexclusion
WhoelseisInsured?(Continued)
• Franchisor’sassociatehasotherexposuresundertheActthatwouldn’tbecovered-eg.s.4(5),s.6(6),s.7(1)(misrepresentationinstatementofmaterialchange)
WhoelseisInsured?(Continued)
• Otherswhofranchisorsmightwanttoincludeincoverage:
• Franchisor’sagent- s.7(1)(b)• Franchisor’sbroker- s.7(1)(c)–Wouldprotectfranchisoragainstclaimoverforindemnity
WhoelseisInsured?(Continued)
• Also,unders.7(1)(e),franchiseehasrightofactionfordamagesagainst“everypersonwhosignedthedisclosuredocumentorstatementofmaterialchange”
• Coveragetypicallyisforacts/omissionsofDs&Os“intheircapacityassuch”or“solelybyreasonoftheirstatusassuch”
• WillPolicycoverdirectorswhosigndisclosurestatementsfortheirpersonalexposure?
Question5• Aretherestandardexclusionsinfranchisorinsuranceandifso,whatarethey?
Exclusions
• Someexclusions(notanexhaustivelist,refertopolicywordingsforcompletelisting)areasfollows:– InsuredvsInsured:Considerationmaybegiventothefranchisor.Thisexclusionmaybeamendedwhereapplicabletoallowsuitsbetweenfranchisor&franchisee.
– DeliberatecriminalordeliberatefraudulentactsbytheInsured.
ExclusionsContinued)• Pending&PriorLitigation/RetroactiveDates• CoveragethatwouldbeofferedunderaCommercialGeneralLiabilitypolicy
• Pollution• EmploymentPracticesLiability:CoveragecanbeendorsedontotheD&Opolicy
• Breachofcontract.ThefranchisoramendatorywordingclarifiesthatthisexclusionshallnotapplytoArthurWishartActCosts.
Exclusions(Continued)• ProfessionalLiabilityExclusion:• RegardingEmployedLawyers:Itisnottheintentofthepolicytoinsureemployedlawyersiftheemployedlawyerofthefranchisorisgivinglegaladvicetothefranchisees.AnErrors&Omissionsliabilitypolicywouldbestronglyrecommendedifthisisthecaseinyoursystem.
• Ifyoursystemprovides“professionalservices”,thispolicywillnotinsurethisexposure.ItisrecommendedthatyoupurchaseseparateProfessionalLiabilityinsurance.Anexampleofthiswouldbeforaccountant/taxworkfranchisesystems.
FranchisorE&OCoverage• NEWEnhancement!FranchisorProfessionalLiability
Endorsement• Whatifafranchiseeisnotseekingrescissionandissimply
seekingindemnityforafinancialloss?AnE&OpolicywouldrespondtoanError&Omissioninrespectofthefranchiseservicesthefranchisorisprovidingtofranchiseesonanongoingbasis.Theremaybeanallegationofnegligenceintheprovisionofwhatisoutlinedinthedisclosure/franchisecontracts.
• TheD&Opolicywouldbeprimary,theE&Owouldbethesecondarypolicy.ThereisNOstackingoflimits,andanon-stackingdeductible.Separatelimitscanbepurchased.
Question6• Whatlegalissuesarisefromthoseexclusions?Aretheyfair?Practically,willtheyworkandwillthepolicystillbeeffective?
LegalIssueswithExclusions• Insuredvs.InsuredexclusioniscommoninD&Opolicies
• Alsocommonfortheretobeexceptionstotheexclusion,suchasDefenceCosts(ofanindividualInsured),derivativeactionsbroughtbyoutsideparties,claimsarisingfrombankruptcyorinsolvencyproceedings
• DeliberatecriminalorfraudulentactsbyInsuredinvariablyexcluded– Oftensubjecttoprovisothatexclusiondoesnotapplyuntilallegedactisprovenincourt,meaningthatDefenceCostswillbeadvanced
LegalIssueswithExclusions(Continued)
• PendingandPrior:ClaimsMadepolicy- thereforecommontoexcludecoverageformattersthatwereinplaypriortoinception– Oftenextendstomattersofwhichnoticehadbeengivenprior
toinceptionthathadnotyetripenedintoClaim• Personalinjury,bodilyinjuryandpropertydamageclaims
areexcludedbecausetypicallycoveredunderCGLPolicy• PollutionClaimsalmostalwaysexcluded- subjecttostand-
alonepolicies– Buttheremaybelimitedcarve-outtoexclusion,e.g.protecting
individualDs&OswhoarenotindemnifiedbytheCompany,orcertainkindsofpollutionclaimsandnotothers
– Mayalsobesubjecttohigherretention
EPLPolicyIssues
• Employment-relatedclaimsexcludedbecausecanbecoveredunderEPLpolicy.
• EPLcoversClaimsbyEmployeesfor,interalia,wrongfuldismissal,harassment,discrimination,otheremployment-relatedclaimssuchasmisrepresentations,defamation+Claimsbythirdpartiesforharassmentordiscrimination
EPLPolicyIssues(Continued)• Iffranchisorsandfranchisorsbecome“jointemployers”willEPLprovideprotectiontofranchisors?
• Willdependonwordingofthepolicy.• Canexpectinsuranceindustrytoreacttopotentialsignificantincreasedexposuretorisk:premiumincreases,exclusions,higherretentionsetc.
• FranchisorsmightwanttobeaddedasinsuredstofranchiseeEPL’s.
• Professionalliabilityexclusion:LossinconnectionwithClaimsalleging,arisingoutof,Insured’sperformanceorfailuretoperformprofessionalservicesforothers,plusacts,errors,omissionsrelatingthereto
• E&Oprovidescoverageforperformanceofservicesasdefined• Couldincludeexposuretoclaimsbyfranchiseesforfailingtoadhere
toobligationsunderfranchiseagreementsuchasfailingtoprovidemarketingortrainingsupport
• Alsocouldcoverclaimsbyfranchiseesforindemnityagainstclaimsbythirdparties,basedonallegedfailureoffranchisortoperformcontractualobligations
• CouldoverlapwithsomeofcoveragesunderD&O• Butnoteexclusions,includingvicariousliability
E&OPolicyIssues
Question7• Whatarethecoveragelimitsanddoesfranchisorinsurancecoverclaimsbyfranchiseesinotherprovinces?WhataboutfranchiseesoutsideofCanada?
CoverageLimits• Limitsupto$10,000,000.Aggregate/PerclaimforDirectors&OfficersLiability
• Sub-limitofupto$2,000,000.Aggregate/PerClaimforFranchisorAmendatoryCover
• Retentionstartsfrom$25,000forD&O,$100,000forClassActionsand$10,000forEmploymentPracticesLiabilityclaims(ifcoverisselected)
Territory• ProductisforfranchisorswithanexposuretoArthurWishartClaimsorotherprovincialfranchisedisclosurestatutes.ThecarrierisNOTentertainingrescissionclaimsarisingfromAmericanorothercountries’franchisedisclosurestatutes.TerritorylimitontheD&Opolicyisworldwide.
Question8• Inadditiontoclaimsforrescissionanddamagesformisrepresentation,arethereothertypesofclaimsimportanttofranchisingthatshouldbecoveredbyfranchisorinsurance?
OtherTypesofClaims
• s.3(2)- claimfordamagesforbreachofdutyoffairdealing
• althoughthismaynotbeinsurable• s.4(5)- claimfordamagesforinterferingwithfranchiseerighttoassociate
• Misrepresentationclaimsoutsides.7- theremaybecoveragealready
• Vicariousliability• OtherClaims– coveredbystandardpolicies(auto,CGL,property,etc.)
Question9• GiventhatfranchisorinsuranceisrelativelynewtotheCanadianmarket,whatcanfranchisorsexpectinthewayofannualpremiums?Arepricescompetitiveenoughatthisstage?Whatfactorsareconsideredwhenevaluatingpremiums?
Premiums/Applications• Premiumsourofficehaveseenquotedthusfarrangefrom$3,500.- $11,000.for12monthsofcoverage.Factorssuchassize,numberofunits,territory,claimshistory,balancesheethealth,changesinthefranchiseagreement,andrecordsanddocumentationmaintenanceprotocols.
• Anapplicationspecificallydesignedforfranchisorsisrequired,latestfinancialstatements,alistofdirectors&officers,andifmorethan500units,acopyoftheFranchisorAgreement.
Question10• Assumingthatmostfranchisorsalreadyhavestandardliabilityinsuranceinplace,wouldyouadvisethemtoreplaceitwithfranchisorinsurancegoingforward,orsupplementitwithexistingD&Oinsurance?
Lawyer’sRole• Makessensetogettailoredfranchiseinsurance
• Wouldreferclientstoknowledgeableandexperiencedbrokertodetermineappropriatecoveragesandadviseongaps
• Icanreviewpoliciesandadviseoninterpretationandpotentialissues
Question11• Theissueofjointemployerstatusisapopulartopicthesedays.Haveinsuranceproductscaughtuptothatissueandifnot,whataresomepotentialimplicationsofthis?Wouldafindingofajointemployerbecoveredunderfranchisorinsurance?
JointEmployers
• EmployersLiability/CommercialGeneralLiability
• EmploymentPracticesLiability• EmployeeFidelity• CyberRisk
Question12• Doesthenatureoffranchisorinsurancechangethewayinwhichafranchisorshouldbestructured?Doyouthinkthatitsignificantlyreducesafranchisor’sriskandchangesthenatureinwhichfranchisorsarestructured?
RiskManagement• Exposuretoliabilitymayaffectstructureoffranchisor
• Soabsenceofinsurancecoveragemightberelevantbutnotfactofinsuranceitself
• Insurancemanages/transfers/mitigatesrisk• Insurerswhounderwriterisksexpectinsuredstoexerciseotherriskmanagementstrategies
Thankyou!
Questions?
