A franchisee submits their annual certificate of insurance. It shows $1 million in general liability, workers' comp, and a $2 million umbrella. The franchise agreement requires $3 million in umbrella. Nobody catches the gap because the compliance team processes 200 certificates per year and does a visual check on most of them.
Six months later, a customer slip-and-fall at the franchisee's location generates a $2.6 million verdict. The franchisee's coverage-$1 million GL plus $2 million umbrella-maxes out at $3 million. The verdict was $2.6 million. The gap: $600,000 beyond franchise agreement requirements.
The franchisor, named as an additional insured, faces exposure for the gap. The franchise agreement required $3 million in umbrella, which would have provided sufficient coverage. No one enforced it.
Understanding What a Franchisee COI Must Show
A certificate of insurance is an ACORD 25 summary document. For franchise purposes, it must show specific information that the compliance team can verify against the franchise agreement:
Named Insured
The named insured on the franchisee's COI must be the franchisee's legal entity-the exact entity that signed the franchise agreement. Common franchise entity structures:
- Single-location franchisee LLC (e.g., "Smith Burgers LLC")
- Multi-location franchisee with a holding entity (each location may need its own certificate, or the holding entity may be the primary insured)
- Individual franchisee doing business under a DBA
Verify that the named insured is the entity in the franchise agreement-not a parent company, related entity, or DBA alone.
Coverage Lines Required
Most franchise agreements require the following on a COI:
| Coverage Line | ACORD 25 Field | What to Check |
|---|---|---|
| Commercial General Liability | Section 1 | Check occurrence/aggregate limits |
| Commercial Auto | Section 1 | Check combined single limit |
| Workers' Compensation | Section 1 | Statutory confirmed |
| Employers' Liability | Section 1 | Per accident/disease limits |
| Umbrella/Excess | Section 1 | Limit and "follows form" |
| Other per agreement | Description | Liquor liability, EPL, professional |
Coverage Limits
Compare each limit to the franchise agreement requirement:
| Coverage | Agreement Requires | COI Shows | Status |
|---|---|---|---|
| GL Per Occurrence | $1,000,000 | $1,000,000 | Compliant |
| GL Aggregate | $2,000,000 | $2,000,000 | Compliant |
| Commercial Auto | $1,000,000 CSL | $1,000,000 | Compliant |
| Umbrella | $3,000,000 | $2,000,000 | Non-Compliant |
| EPL | $1,000,000 | Not Present | Non-Compliant |
This comparison must happen for every certificate-not just a visual scan. 70% of COIs have at least one gap when systematically compared to requirements.
Certificate Holder
The franchisor should be listed as certificate holder-ensuring cancellation notice is received if the franchisee's policy lapses. The certificate holder box should show the franchisor's legal name and address.
Additional Insured Designation
The franchisor must be named as an additional insured on the franchisee's CGL policy. The COI should reference this, but the compliance team must verify the actual endorsement:
What the COI should show: "Additional Insured: [Franchisor Legal Name] and its affiliates, officers, directors, and employees, per [endorsement form number]."
What must be confirmed: The endorsement form is actually on the policy-request it attached to the certificate submission.
What the endorsement must specify:
- Franchisor's correct legal entity name
- Primary and non-contributory language
- Coverage extends to the scope of the franchise agreement
- Completed operations coverage (if the franchise involves installation, construction, or service work)
State-Specific Naming Issues
In multi-state franchise systems, entity naming creates compliance complexity:
- The franchisor may have different legal entities in different states (e.g., "XYZ Franchise LLC" in most states, "XYZ Franchise of California LLC" for California operations)
- State-specific franchise registration requirements may require different entity names in the AI endorsement
- Some states have specific requirements for endorsement forms or additional insured language
Build a state-specific AI naming matrix for your franchise system and include it in franchisee instructions.
Waiver of Subrogation Requirements
Most franchise agreements require a waiver of subrogation on the franchisee's CGL and workers' compensation policies, in favor of the franchisor. On the COI, this appears as:
- A checked "WOS" box in the corresponding coverage section
- A note in the description referencing waiver endorsement
As with AI, the checked box is not sufficient. The WOS endorsement must be on the policy. Request the endorsement document attached to the certificate submission.
Timing Requirements for Franchisee COI Submission
Your franchise agreement should specify when COIs are required:
- Before opening: COI must be provided before the franchisee opens for business (or before the license is granted)
- Annually: COI must be renewed and resubmitted annually (typically 30 days before policy expiration)
- Upon request: Franchisor may request a current COI at any time
- Upon business change: COI must be updated if franchisee changes their business structure, adds employees beyond a threshold, or expands their location
Non-submission within the specified timeframe is typically a default under the franchise agreement, triggering cure and escalation provisions.
Handling Non-Compliant Franchisee COIs
When a franchisee submits a COI that doesn't meet requirements:
Step 1: Document the specific deficiencies. List each gap: "Umbrella coverage is $2,000,000; franchise agreement requires $3,000,000."
Step 2: Send a written deficiency notice. Reference the specific franchise agreement clause. State the required value. State the submitted value. Give a cure deadline (typically 10-15 days).
Step 3: Follow up. If no response within 5 business days, follow up directly.
Step 4: Escalate if unresolved. After the cure deadline, escalate to franchise operations or legal. Non-maintenance of required insurance is a default under most franchise agreements.
Step 5: Document everything. Every notice, every response, every resolution. This documentation is your protection in coverage disputes and in any franchisee termination proceedings.
Frequently Asked Questions
Q: Should we require franchisees to submit certificates directly to us, or can they submit through their brokers? A: Either works. Direct submission from the broker is often more reliable because brokers understand the document requirements better than franchisees. Including broker contact information in your renewal requests allows you to follow up directly.
Q: What happens to our additional insured coverage if the franchisee's policy is canceled mid-year? A: Your AI status terminates with the policy. If the franchisee has a coverage lapse and an incident occurs during the lapse, your AI coverage from the terminated policy doesn't apply. This is why monitoring policy cancellation notices (through the certificate holder designation) and requiring immediate notification of any policy changes is critical.
Q: Do we need separate COIs for franchisees who operate multiple locations? A: It depends on how the franchisee's coverage is structured. A single policy covering multiple locations under one franchisee entity may be acceptable with a schedule of locations attached. Separate entities for each location require separate policies and certificates.
Q: Can we require franchisees to use specific carriers? A: You can require carriers to meet a minimum AM Best rating (A- or better is standard) and to be admitted in the state of operation. You can also create an approved carrier list, though this must be disclosed in the FDD and may limit franchisee options in some markets.
Bramble reads franchise agreements and compares every clause to the franchisee's submitted COI-flagging gaps immediately, generating specific deficiency notices, and maintaining the documentation that protects the franchisor when coverage is contested.