KFC FDD Insurance Clause Teardown – 4 Issues I Would Change

KFC is a well-known brand with an incredible origin story. Colonel Sanders was a latecomer to the scene, at 62 he franchised his first KFC, and only when he was 75 did he become a national icon after selling his business. Throughout his life, he mostly weathered misfortune but stuck it out and eventually found great success.

FDD Insurance Clause

Every franchise disclosure document has an insurance clause in it where the franchisor specifically outlines the insurance requirements for each franchisee.

Depending on the type of franchise, industry, size & location the insurance requirements may differ. Each is unique in its own way and should be understood thoroughly.

4 Issues Found in The Insurance Clause

During my discovery period, I found several issues that were within the insurance clause of the FDD. Some were major and others minor. At the same time, there are a few concerns with the limitations that the current insurance environment affords. There simply isn’t a sophisticated way to do certain things that are necessary for a franchisor to mitigate risk effectively.

Let’s dive into them.

In-force Coverage at “All Times”

KFC, along with all franchisors for that matter, clearly wants to enforce that all franchisees have insurance coverage in place at all times. The question becomes, how?

The current process of verifying insurance has been around for more than 30 years, collect a PDF document from the franchisee and cross your fingers that everything on it is accurate and true.

So the fundamental problem isn’t necessarily the process, it’s the document that is being relied on, which over time has become an industry “best practice.”

The only way KFC can actively monitor the insurance of all 23,000 franchisees is to implement a real-time insurance verification monitoring platform… which is what we are working on.

Actual Cash Value for Property

I was a little alarmed that I saw a requirement for actual cash value and not replacement cost coverage. This may be an oversight but there is a major difference in coverage:

Actual Cash Value

The cost to repair or replace the damaged property, minus depreciation

Replacement Cost Coverage

The cost to replace the damaged property with materials of like kind and quality without any deduction for depreciation.

You can see there are clear differences between these two coverages. KFC is also only requiring 80% of actual cash value. Let’s take a real-world example:

A new stove for a KFC franchise costs $10,000
6 years later it depreciated to $3,000
80% of the depreciated value is only $2,400

If you followed KFC’s insurance requirements, you would only get $2,400 from the insurance company if your stove was destroyed due to an insured loss. Which clearly is not enough.

On the other hand, if you had replacement cost coverage, you’d be able to purchase a new stove to replace the one today for what it costs today.

Low General Liability Limits

Another odd thing I came across during my review was the low liability limits KFC required. Most standard contracts will require at least $1,000,000 occurrence and $2,000,000 aggregate. However, KFC only requires a measly $300,000 in coverage.

The coverage should be bumped up to the industry standard stated before to protect both the franchisee and franchisor better.

30 Day Advance Written Notice

Another standard insurance clause here in the FDD for KFC however, there is a major misconception about it.

Most business owners’ policies written by insurance companies these days have what’s called blanket additional insured. This coverage automatically offers additional insured status to those that require it via written contract (among other ways).

Since the coverage is automatic a certificate of insurance can be produced by an insurance representative with the 30-day cancellation notice to fulfill the requirement but it doesn’t mean that the insurance company or the insurance representative will actually notify KFC of the pending cancellation.

If the coverage is automated it means the insurance representative never had to notify the insurance company of KFC’s request. Therefore the insurance company would not know to notify KFC of pending cancellation. Therein lies the problem with the existing paper process.

In the event the policy cancels, KFC may not know until they follow up for another certificate of insurance, which could be 12 months later. This leaves KFC completely exposed.

Conclusion

The insurance industry is ripe for change specifically as it relates to real-time insurance verification. Rikor is poised to offer a solution to entities that need a solution to the ever-growing problem. Reach out to us today to discuss what we can do for you.

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