Legal Definitions - franchise clause

A franchise clause is a specific provision found in some insurance policies, particularly in casualty insurance. It dictates that the insurer will only pay for a claim if the total damages exceed a predetermined threshold amount, often referred to as the "franchise limit." If the claim's value falls below this threshold, the insured party is responsible for covering the entire cost of the damages. However, if the claim surpasses the specified threshold, the insurer pays the full amount of the claim, not just the portion above the threshold. This differs from a standard deductible, where the insured always pays the deductible amount, and the insurer covers the rest.

Here are a few examples to illustrate how a franchise clause works:

• Commercial Property Insurance: Imagine a small manufacturing business has a property insurance policy with a $15,000 franchise clause for water damage. One day, a minor pipe bursts, causing $12,000 in damage to their office space and equipment. Because the damage amount ($12,000) is below the $15,000 franchise limit, the business owner must pay for all $12,000 of the repairs themselves, and the insurer pays nothing.

  How it illustrates the term: This scenario demonstrates that if the claim is under the franchise limit, the insured bears the full cost, as per the franchise clause.

• Marine Cargo Insurance: A company shipping a large consignment of electronics overseas has a marine cargo insurance policy with a $5,000 franchise clause for damage during transit. During the voyage, a storm causes significant damage to a portion of the cargo, resulting in a total loss estimated at $25,000. Since the damage amount ($25,000) exceeds the $5,000 franchise limit, the insurance company will pay the entire $25,000 claim, covering the full loss for the shipping company.

  How it illustrates the term: This example highlights that once the claim surpasses the franchise limit, the insurer covers the entire amount of the loss, not just the portion above the limit.

• Event Cancellation Insurance: An event organizer purchases insurance for a major outdoor festival, which includes a $10,000 franchise clause for losses due to unforeseen weather events. A sudden, severe thunderstorm forces the cancellation of a single day of the festival, leading to $8,000 in lost ticket sales and vendor fees. In this case, because the $8,000 loss is less than the $10,000 franchise limit, the event organizer is responsible for absorbing the entire $8,000 financial impact.

  How it illustrates the term: This shows another instance where a claim falling below the franchise threshold results in no payout from the insurer, leaving the insured to cover the full cost.