Download - Insurance Considerations for Franchisors · Fasken Martineau DuMoulin LLP Jennifer Tyrwhitt Gory, B. Mus. ED., C.A.I.B., President Insurance Portfolio Inc. Marta Jankovic, Associate

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


• ThisexclusionhasbeenusedtodenycoveragetofranchisorsintheU.S.formisrepresentationissues.

• CousinsSubmarines v.FederalInsuranceCo. (Dist.Ct.Wisc.,2013)

• ClaimbyfranchiseesagainstfranchisoranditsofficersanddirectorsformisrepresentationthatenticedthemtoopenCousinsfranchises,breachofthefranchiseagreement,unlawfulrescissionofthefranchiseagreement,andviolationoffranchiselegislation

• Franchisorsettledwithfranchiseesbypayingthem$750,000.


• FranchisorsoughtcoveragefromFederalwhodeniedonbasis,interalia,ofexclusionforcontractualliability

• Courtheldthattheexclusionclausebarredcoverage


• Amongthereasons:Cousins’liabilityformisrepresentationclaimstemmedprimarilyfromthecontractitenteredintowithfranchisees,andrescissionofthecontractwouldfallunderthecontract– Althoughcourtallowedforpossibilitythattoextentliabilitywasbasedonrelianceonmisrepresentationsanddamagespriortoenteringintocontract,suchliabilitywouldexisteveninabsenceofcontractandwouldnotbeexcluded.


• Also:liabilityforclaimunderstatutewasexcluded.Statutesaidpersonwho(e.g.)makesuntruestatementofmaterialfactisliablefordamagestoanypersonwhoreliedonmisrepresentationoruntruestatementinpurchasingfranchise.– Held:sinceliabilityrestsonmisrepresentationsthatinducedfranchiseestoenterintofranchiseagreements,theliabilitystemsfromthecontract


• Whetherclaimunders.6or7ofArthurWishartstatutewouldfallwithinexclusionwoulddependonwordingofexclusion:wouldtheclaimbeheldtobebasedon,arisingfromactualorallegedliabilityundercontract?Orunderstatute?

• HasnotbeentestedinCanada,andwilldependonwordingofpolicy

• ButWisconsincasesuggestssuchclaimcouldfallwithinexclusion


• AmendatoryendorsementrestorescoverageforLossinconnectionwithClaimsmadethatallege,ariseoutoforareattributabletocontractualliabilitywhereClaimisforrescissionordamagesformisrepresentationunderArthurWishartActorsimilarprovinciallegislation

• AlthoughIunderstandavailablelimitsforthisrestoredcoveragearelow

• AndDefenceCostsusuallyareincludedinlimits


• 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


• Franchisor’sassociatehasotherexposuresundertheActthatwouldn’tbecovered-eg.s.4(5),s.6(6),s.7(1)(misrepresentationinstatementofmaterialchange)


• Otherswhofranchisorsmightwanttoincludeincoverage:

• Franchisor’sagent- s.7(1)(b)• Franchisor’sbroker- s.7(1)(c)–Wouldprotectfranchisoragainstclaimoverforindemnity


• 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?

Download - Insurance Considerations for Franchisors · Fasken Martineau DuMoulin LLP Jennifer Tyrwhitt Gory, B. Mus. ED., C.A.I.B., President Insurance Portfolio Inc. Marta Jankovic, Associate

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