Gray Plant Mooty franchise lawyer Carl Zwisler, spoke with his colleague Nicholas Nierengarten, an insurance coverage lawyer to discuss whether insurance coverage can protect franchisors and franchisees from joint employer risks, as well as other risks that are common in franchising. This is part one of their chat.
Carl Zwisler: When businesses confront risks, insurance carriers usually evaluate the risks and use the opportunity to write new or revised insurance policies. For decades franchise agreements have required franchisees to obtain a series of insurance policies, and to usually name the franchisor as an "additional insured." Subject to deductibles, co-pays and interpretations of coverage, the insurance policies protect franchisees and their franchisors from both the cost of defending certain claims, and, in many cases, the cost of paying a settlement or judgment to a plaintiff.
Recently, franchisors have a heightened concern about risks arising from vicarious liability claims and joint employer claims. Nick, what risks to franchisors usually require franchisees to insure against, and what mistakes to they often make when writing insurance requirements in their franchise agreements and operations manuals?
Nicholas Nierengarten: Typically, franchisors require franchisees to purchase a standard set of insurance policies, including Commercial General Liability (CGL), Employment Practices Liability (EPLI), Commercial Auto, Workers’ Compensation/Employer’s Liability, and property insurance. Depending on the nature of the franchise, other types of insurance should be required.
A common mistake is the failure to specify in sufficient detail what insurance the franchisee is required to have in place. Such as failure to specify minimum limits and maximum deductibles, and establish minimum standards for the financial strength of the insurer. Another common mistake is the failure to conform the insurance requirements in the operations manual with current types of insurance actually on the market. Sometimes, it’s clear that the insurance provisions are simply carried over from historical agreements without any attempt to evaluate what should be required and meaningfully describe it. The insurance requirements should be written in “insurance speak” so that the franchisee can hand the requirements to its broker, who can then procure the right types of coverage. The most frequent mistake is to require the franchisee to only provide a Certificate of Insurance as proof of insurance. Certificates of Insurance are not issued by the insurer and cannot be relied on as proof that the required coverages are actually in place. At a minimum, franchisors should require the franchisee to provide the declarations pages and applicable endorsements for the required policies.
CZ: The threat that has the franchising community uncomfortable now is the prospect of joint employer liability under the NLRB's Browning-Ferris decision, the NLRB GC's case against McDonalds, and the Department of Labor Wage and Hour Division's joint employer standards issued in January, 2016. Is Employment Practices Liability Insurance (EPLI) a panacea for these claims? If not, should franchisors and franchisees still obtain it?
NN: Although the wording differs, an EPLI policy will usually cover wrongful discrimination and wrongful employment acts. Wrongful discrimination can include actual or alleged violation of any law or public policy concerning discrimination and harassment. Wrongful employment can include actual or alleged discrimination based on race, national origin, religion, sex, sexual preference, marital status or disability and employment related torts (e.g., wrongful termination, wrongful discipline, retaliation, and workplace harassment).
The policy typically excludes risks insured under other types of insurance, such as bodily injury, property damage and other general liability risks, as well as, workers’ compensation, unemployment insurance, social security and disability benefits. In addition, a number of statutory claims are excluded, such as Employee Retirement Income Security Act (ERISA), Consolidated Omnibus Budget Reconciliation Act (COBRA), Worker Adjustment and Retraining Act (WARN), Occupational Safety and Health Act (OSHA), Fair Labor Standards Act (FLSA) (and “similar state statutes”), and the National Labor Relations Act (NLRA).