Insurance Requirements in Franchise Agreements

Almost every franchise agreement requires the franchisee to carry specific types of insurance, at minimum coverage limits, and to name the franchisor as an additional insured — and failing to keep that coverage in force is usually a default that can put your franchise at risk. The insurance clause is easy to skim, but it controls a real cost and a real obligation for the entire term. This guide explains what franchisors typically require, the clauses that quietly add cost, and the points a franchisee should check before signing.

Why the Insurance Clause Matters

The insurance clause protects the franchisor as much as it protects you. By requiring coverage, the franchisor ensures that a customer injury, a fire, or a liability claim at your location is paid by an insurer rather than threatening the brand or pulling the franchisor into the lawsuit. For the franchisee, the clause is a compliance obligation with teeth: most agreements treat a lapse in required coverage as a curable default, and a continued lapse as grounds for termination. So the practical question is not whether you will carry insurance, but whether the agreement’s specific requirements fit your business and budget.

Coverage Types Franchise Agreements Commonly Require

Franchise agreements usually specify several lines of coverage. The exact mix depends on the industry — a food franchise and a home-services franchise face different risks — but the common requirements are:

Industry-specific lines often get added — liquor liability for bars, commercial auto for delivery, professional liability for service brands, and increasingly cyber liability where customer data is handled. The agreement, not your preference, sets the required list and the minimum limits.

The Clauses That Add Cost: Additional Insured and Waiver of Subrogation

Two requirements buried in most insurance clauses deserve specific attention because they shift risk and can affect your premium. First, the agreement almost always requires you to name the franchisor (and often its affiliates) as an additional insured on your policy, so the franchisor is covered under your insurance for claims arising from your operation. Second, many agreements require a waiver of subrogation, which bars your insurer from later seeking reimbursement from the franchisor even if the franchisor contributed to a loss. Both are standard, but both can affect cost and availability, so confirm your insurer will issue them and factor that into your quotes. Watch also for required minimum limits that rise over the term and for the franchisor’s right to demand more coverage at its discretion.

A Texas Note: Workers’ Compensation Is Optional Here

Texas is unusual, and it matters for franchisees operating in the state. Texas is the only state where private employers can legally choose not to carry workers’ compensation insurance — so-called non-subscribers. Many franchise agreements, drafted for a national system, simply require workers’ comp anyway, which overrides the choice Texas law would otherwise give you. If you intend to be a non-subscriber, check whether your franchise agreement permits it; if it requires coverage, you must carry it regardless of state law. And understand the trade-off either way: a Texas employer that opts out loses key common-law defenses (such as contributory negligence and the exclusive-remedy bar) and can be sued directly by an injured employee. This is a point worth confirming with both counsel and an insurance broker before you sign.

What to Check Before You Sign

Treat the insurance clause as a budget item and a legal obligation, not boilerplate. Before signing, confirm the required coverage types and minimum limits, and price them with a broker who knows franchising. Verify your insurer will provide the additional-insured endorsement and any waiver of subrogation the agreement demands. Check whether limits escalate over the term or can be raised at the franchisor’s discretion, and read the consequences of a lapse in the default and termination provisions. Because a coverage lapse is a common, avoidable way to fall into default, build a renewal-tracking habit from day one. For how insurance fits the broader agreement, see franchise agreement key terms, and for how defaults escalate, see how a franchise agreement can be terminated.

Frequently Asked Questions

Can a franchisor require me to name it as an additional insured?

Yes — it is standard. The clause covers the franchisor under your policy for claims arising from your operation. Confirm with your broker that the endorsement is available and included in your quoted premium.

What happens if my insurance lapses?

Most franchise agreements treat a lapse in required coverage as a default. Typically you get a cure period to reinstate coverage, but a continued lapse can be grounds for termination. Tracking renewals is the simplest way to avoid this.

Are franchise insurance requirements negotiable?

Sometimes the limits or specific endorsements can be adjusted, especially if a requirement is impractical for your industry or location. Core requirements rarely change, but it is worth raising impractical terms before signing rather than after.

Do Texas franchisees have to carry workers’ compensation?

Not under Texas law — Texas private employers may opt out. But your franchise agreement may require it anyway, which overrides that option. Check the agreement, and weigh the legal trade-offs of non-subscriber status with counsel before deciding.

The insurance clause sets a cost and a compliance duty that run for the full term, and the additional-insured, waiver, and Texas workers’-comp points are easy to miss until they bite. Reidel Law Firm reviews franchise agreements for franchisees and franchisors and flags exactly these terms — talk to a franchise attorney before you sign.