Insurance Considerations for Franchisors

Transcription

1 Insurance Considerations for Franchisors Jennifer Tyrwhitt Gory, B. Mus. ED., C.A.I.B., President Insurance Portfolio Inc. Marta Jankovic, Associate Sotos LLP David C. Rosenbaum, Partner Fasken Martineau DuMoulin LLP

2 Disclaimer All information and opinions contained in this presentation are for general information purposes only and do not constitute legal or any other type of professional advice. The content of this presentation is not intended to be a substitute for specific advice prepared on the basis of an understanding of specific facts. Any reliance on this information is at the reader s own risk.

3 Question 1 What insurance products are currently available to franchisors above and beyond the standard directors and officers liability insurance?

4 Franchisor Amendatory AIG Insurance Company offers an amendatory which amends AIG s Private Company Directors & Officers Liability wording. This is called a franchisor amendatory endorsement. AIG Insurance Company of Canada is rated A (Excellent) as at November 2015, with AM Best, Outlook Stable, and has been rated A (Excellent) since at least Policy is designed for registered Canadian franchisor businesses operating in Canada. Directors & Officers Policies cover wrongful acts meaning any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act.

5 Franchisor Amendatory (continued) Highlights of the Franchisor Amendatory include: Covers Arthur Wishart Act Costs Loss incurred in connection with a claim of rescission, or for damages for misrepresentation, under or pursuant to the Arthur Wishart (Franchise Disclosure) Act or any similar provincial franchise disclosure statute. Carves back cover for breach of contract, standard exclusion on Directors & Officers Liability policies.

6 Question 2 What legal issues do you foresee with this type of product, and how might those issues impact a franchisor s litigation strategy?

7 Legal Issues Exposure to rescission and misrepresentation claims is a big issue for franchisors

8 Legal Issues (Continued) Typical D&O policy excludes liability for Loss in connection with Claim made against Insured alleging, arising out of, based upon or attributable to actual or alleged contractual liability of the Insured under a contract Although the exclusion will not apply to liability which would have attached in absence of contract

9 Legal Issues (Continued) This exclusion has been used to deny coverage to franchisors in the U.S. for misrepresentation issues. Cousins Submarines v. Federal Insurance Co. (Dist. Ct. Wisc., 2013) Claim by franchisees against franchisor and its officers and directors for misrepresentation that enticed them to open Cousins franchises, breach of the franchise agreement, unlawful rescission of the franchise agreement, and violation of franchise legislation Franchisor settled with franchisees by paying them $750,000.

10 Legal Issues (Continued) Franchisor sought coverage from Federal who denied on basis, inter alia, of exclusion for contractual liability Court held that the exclusion clause barred coverage

11 Legal Issues (Continued) Among the reasons: Cousins liability for misrepresentation claim stemmed primarily from the contract it entered into with franchisees, and rescission of the contract would fall under the contract Although court allowed for possibility that to extent liability was based on reliance on misrepresentations and damages prior to entering into contract, such liability would exist even in absence of contract and would not be excluded.

12 Legal Issues (Continued) Also: liability for claim under statute was excluded. Statute said person who (e.g.) makes untrue statement of material fact is liable for damages to any person who relied on misrepresentation or untrue statement in purchasing franchise. Held: since liability rests on misrepresentations that induced franchisees to enter into franchise agreements, the liability stems from the contract

13 Legal Issues (Continued) Whether claim under s. 6 or 7 of Arthur Wishart statute would fall within exclusion would depend on wording of exclusion: would the claim be held to be based on, arising from actual or alleged liability under contract? Or under statute? Has not been tested in Canada, and will depend on wording of policy But Wisconsin case suggests such claim could fall within exclusion

14 Legal Issues (Continued) Amendatory endorsement restores coverage for Loss in connection with Claims made that allege, arise out of or are attributable to contractual liability where Claim is for rescission or damages for misrepresentation under Arthur Wishart Act or similar provincial legislation Although I understand available limits for this restored coverage are low And Defence Costs usually are included in limits

15 Legal Issues (Continued) Prima facie amendatory endorsement should make coverage available (subject to limits and retentions) for Claims under s. 6 or 7 of Arthur Wishart Act But may not extend coverage to other types of Claims that could arise under statute, such as: s. 3(2)- claim for damages for breach of duty of fair dealing s. 4(5)- claim for damages for interfering with franchisee right to associate May not extend coverage to misrepresentation claims outside s. 7 (misrepresentation in disclosure document or statement of material change or due to failure to comply with s. 5) Although such claims may not be excluded

16 Question 3 In addition to directors and officers, who does franchisor insurance typically cover? For example, are executives and other employees covered? What about franchise brokers that work on a contract basis for a franchisor?

17 Who is Insured? Who is covered? Broad coverage is not just for Directors & Officers, but includes: The Executive of an Organization, employee of an Organization or Outside Entity Executive. The franchisor amendatory amends the definition of Insured Person to include Franchisor s Associate.

18 Question 4 Are there other individuals that franchisors should be concerned about having covered?

19 Who else is Insured? Corporate franchisor often also covered under D&O policy for its own Wrongful Acts, i.e., its actual or alleged breach of duty, neglect, error, omission, misstatement etc. Often covers past, present and future directors, executives, employees etc.

20 Who else is Insured? (Continued) Amendatory endorsement adds Franchisor s Associate to Insured Persons (in connection with the franchisor), but restricts coverage to alleged non-compliance with statutory disclosure obligation or alleged misrepresentation in a disclosure document But quaere effect of insured vs. insured exclusion

21 Who else is Insured? (Continued) Franchisor s associate has other exposures under the Act that wouldn t be covered-eg. s. 4(5), s. 6(6), s. 7(1) (misrepresentation in statement of material change)

22 Who else is Insured? (Continued) Others who franchisors might want to include in coverage: Franchisor s agent- s. 7(1)(b) Franchisor s broker- s. 7(1)(c) Would protect franchisor against claim over for indemnity

23 Who else is Insured? (Continued) Also, under s. 7(1)(e), franchisee has right of action for damages against every person who signed the disclosure document or statement of material change Coverage typically is for acts/omissions of Ds & Os in their capacity as such or solely by reason of their status as such Will Policy cover directors who sign disclosure statements for their personal exposure?

24 Question 5 Are there standard exclusions in franchisor insurance and if so, what are they?

25 Exclusions Some exclusions ( not an exhaustive list, refer to policy wordings for complete listing) are as follows: Insured vs Insured: Consideration may be given to the franchisor. This exclusion may be amended where applicable to allow suits between franchisor & franchisee. Deliberate criminal or deliberate fraudulent acts by the Insured.

26 Exclusions Continued) Pending & Prior Litigation/Retroactive Dates Coverage that would be offered under a Commercial General Liability policy Pollution Employment Practices Liability: Coverage can be endorsed onto the D&O policy Breach of contract. The franchisor amendatory wording clarifies that this exclusion shall not apply to Arthur Wishart Act Costs.

27 Exclusions (Continued) Professional Liability Exclusion: Regarding Employed Lawyers: It is not the intent of the policy to insure employed lawyers if the employed lawyer of the franchisor is giving legal advice to the franchisees. An Errors & Omissions liability policy would be strongly recommended if this is the case in your system. If your system provides professional services, this policy will not insure this exposure. It is recommended that you purchase separate Professional Liability insurance. An example of this would be for accountant/tax work franchise systems.

28 Franchisor E&O Coverage NEW Enhancement! Franchisor Professional Liability Endorsement What if a franchisee is not seeking rescission and is simply seeking indemnity for a financial loss? An E&O policy would respond to an Error & Omission in respect of the franchise services the franchisor is providing to franchisees on an ongoing basis. There may be an allegation of negligence in the provision of what is outlined in the disclosure/franchise contracts. The D&O policy would be primary, the E&O would be the secondary policy. There is NO stacking of limits, and a nonstacking deductible. Separate limits can be purchased.

29 Question 6 What legal issues arise from those exclusions? Are they fair? Practically, will they work and will the policy still be effective?

30 Legal Issues with Exclusions Insured vs. Insured exclusion is common in D&O policies Also common for there to be exceptions to the exclusion, such as Defence Costs (of an individual Insured), derivative actions brought by outside parties, claims arising from bankruptcy or insolvency proceedings Deliberate criminal or fraudulent acts by Insured invariably excluded Often subject to proviso that exclusion does not apply until alleged act is proven in court, meaning that Defence Costs will be advanced

31 Legal Issues with Exclusions (Continued) Pending and Prior: Claims Made policy- therefore common to exclude coverage for matters that were in play prior to inception Often extends to matters of which notice had been given prior to inception that had not yet ripened into Claim Personal injury, bodily injury and property damage claims are excluded because typically covered under CGL Policy Pollution Claims almost always excluded- subject to standalone policies But there may be limited carve-out to exclusion, e.g. protecting individual Ds & Os who are not indemnified by the Company, or certain kinds of pollution claims and not others May also be subject to higher retention

32 EPL Policy Issues Employment-related claims excluded because can be covered under EPL policy. EPL covers Claims by Employees for, inter alia, wrongful dismissal, harassment, discrimination, other employment-related claims such as misrepresentations, defamation + Claims by third parties for harassment or discrimination

33 EPL Policy Issues (Continued) If franchisors and franchisors become joint employers will EPL provide protection to franchisors? Will depend on wording of the policy. Can expect insurance industry to react to potential significant increased exposure to risk: premium increases, exclusions, higher retentions etc. Franchisors might want to be added as insureds to franchisee EPL s.

34 E&O Policy Issues Professional liability exclusion: Loss in connection with Claims alleging, arising out of, Insured s performance or failure to perform professional services for others, plus acts, errors, omissions relating thereto E&O provides coverage for performance of services as defined Could include exposure to claims by franchisees for failing to adhere to obligations under franchise agreement such as failing to provide marketing or training support Also could cover claims by franchisees for indemnity against claims by third parties, based on alleged failure of franchisor to perform contractual obligations Could overlap with some of coverages under D&O But note exclusions, including vicarious liability

35 Question 7 What are the coverage limits and does franchisor insurance cover claims by franchisees in other provinces? What about franchisees outside of Canada?

36 Coverage Limits Limits up to $10,000,000. Aggregate/Per claim for Directors & Officers Liability Sub-limit of up to $2,000,000. Aggregate/Per Claim for Franchisor Amendatory Cover Retention starts from $25,000 for D&O, $100,000 for Class Actions and $10,000 for Employment Practices Liability claims (if cover is selected)

37 Territory Product is for franchisors with an exposure to Arthur Wishart Claims or other provincial franchise disclosure statutes. The carrier is NOT entertaining rescission claims arising from American or other countries franchise disclosure statutes. Territory limit on the D&O policy is worldwide.

38 Question 8 In addition to claims for rescission and damages for misrepresentation, are there other types of claims important to franchising that should be covered by franchisor insurance?

39 Other Types of Claims s. 3(2)- claim for damages for breach of duty of fair dealing although this may not be insurable s. 4(5)- claim for damages for interfering with franchisee right to associate Misrepresentation claims outside s. 7- there may be coverage already Vicarious liability Other Claims covered by standard policies (auto, CGL, property, etc.)

40 Question 9 Given that franchisor insurance is relatively new to the Canadian market, what can franchisors expect in the way of annual premiums? Are prices competitive enough at this stage? What factors are considered when evaluating premiums?

41 Premiums/Applications Premiums our office have seen quoted thus far range from $3, $11,000. for 12 months of coverage. Factors such as size, number of units, territory, claims history, balance sheet health, changes in the franchise agreement, and records and documentation maintenance protocols. An application specifically designed for franchisors is required, latest financial statements, a list of directors & officers, and if more than 500 units, a copy of the Franchisor Agreement.

42 Question 10 Assuming that most franchisors already have standard liability insurance in place, would you advise them to replace it with franchisor insurance going forward, or supplement it with existing D&O insurance?

43 Lawyer s Role Makes sense to get tailored franchise insurance Would refer clients to knowledgeable and experienced broker to determine appropriate coverages and advise on gaps I can review policies and advise on interpretation and potential issues

44 Question 11 The issue of joint employer status is a popular topic these days. Have insurance products caught up to that issue and if not, what are some potential implications of this? Would a finding of a joint employer be covered under franchisor insurance?

45 Joint Employers Employers Liability/Commercial General Liability Employment Practices Liability Employee Fidelity Cyber Risk

46 Question 12 Does the nature of franchisor insurance change the way in which a franchisor should be structured? Do you think that it significantly reduces a franchisor s risk and changes the nature in which franchisors are structured?

47 Risk Management Exposure to liability may affect structure of franchisor So absence of insurance coverage might be relevant but not fact of insurance itself Insurance manages/transfers/mitigates risk Insurers who underwrite risks expect insureds to exercise other risk management strategies

48 Thank you! Questions?