When the LLC Isn’t Enough: Why Leveraged Franchise Operators Need to Rethink D&O Before the Next Cycle Turns

The recent wave of franchise bankruptcies has generated plenty of post-mortems. Analysts point to over-leveraged balance sheets, fixed-cost structures that couldn’t flex when traffic softened, and brand-level headwinds that franchisees had no power to control. All of that is true. But there’s a conversation happening far less frequently, and it’s a conversation about personal exposure. And about whether the Directors and Officers (D&O) policy sitting in your insurance binder protects you when it matters most.

The Personal Guarantee Problem No One Talks About

Consider what the operators behind these failures actually signed. Lease guarantees. SBA loan covenants. Franchisor development agreements. Lender credit facilities. In the QSR and fast casual franchise world, growth is almost always leveraged and leverage almost always comes with personal signatures attached. The LLC structure provides meaningful protection in ordinary times. But in a bankruptcy proceeding or creditor action, that protection has a way of becoming thinner than most operators realize.

In the case of a 136-unit franchisee that carries $342 million in liabilities against $232 million in assets, as one major QSR operator did heading into bankruptcy earlier this year, the gap doesn’t just sit inside the entity. Lenders, landlords, and co-investors start looking at who signed what. Directors and officers find themselves personally in the crosshairs, often before they fully understand the exposure they’re facing.

The instinct is to assume D&O insurance covers this. Often, it doesn’t, and the reasons why are written into policy language most insureds never examine until it’s too late.

The Two Exclusions That Matter Most

Standard D&O policies contain exclusions that are easy to overlook during underwriting and devastating to discover during a claim. Two are particularly relevant for leveraged franchise operators.

The first is the contractual liability exclusion. Most D&O policies explicitly exclude claims arising from obligations the insured assumed under a contract — which means the personal guarantee you signed on a lease or a credit facility may be precisely the thing your D&O policy won’t touch. The coverage that was supposed to protect your personal assets steps aside at the exact moment a creditor comes calling based on a document you personally executed.

The second is the insured vs. insured exclusion. This provision bars coverage for claims brought by one insured against another, a sensible anti-collusion measure in theory, but a serious gap in practice for franchisee operators backed by PE firms or institutional capital. When a lender who holds a board seat sues the operating directors, or when a co-investor with governance rights brings a claim against management, the insured vs. insured exclusion can strip the policy of its response entirely. The claim is real. The legal fees are real. The personal exposure is real. The policy, in that moment, is not.

Where Side A DIC Coverage Changes the Equation

This is where the conversation needs to go, and where most brokers serving the restaurant space never take it.

Side A Difference in Conditions coverage exists as a separate, standalone layer of protection designed specifically for scenarios where the underlying D&O policy fails to respond. Unlike standard D&O, Side A DIC is written exclusively for the individual directors and officers, not the entity. There is no corporation as a co-insured. There is no shared limit. The coverage belongs entirely to the people whose personal assets are at risk.

More importantly, Side A DIC is structured to cut through base-layer exclusions. Where the primary D&O policy steps back because of a contractual liability carve-out or an insured vs. insured provision, properly structured Side A DIC drops down and responds in its place. It is, in the most literal sense, the backstop behind the backstop.

In a bankruptcy scenario, this distinction becomes critical. When a company files Chapter 11, D&O coverage can become a contested asset of the estate, meaning the entity’s creditors may have a claim on the policy limits before the directors and officers see a dollar of protection. Side A DIC, because it is written solely for individuals and carries no entity coverage, sits outside the bankruptcy estate. It cannot be reached by creditors. For a CEO or CFO navigating a restructuring while simultaneously facing personal claims, that structural separation is not a technical detail. It is the difference between protected personal assets and an undefended exposure.

The Coverage Review Every Operator Should Prioritize

The macro environment facing QSR and fast casual operators remains unsettled. Food costs are volatile, borrowing rates have reshaped growth capital economics, and consumer traffic patterns continue to strain fixed-cost models. Many operators who filed bankruptcy in 2025 were not poorly run businesses. They ran out of margin for error in an environment that kept redefining enough.

Most multi-unit operators already carry D&O insurance. The more pressing question is whether that policy has been reviewed against the specific risk profile of a leveraged franchise operation: how it responds when a lender or co-investor brings a claim, whether personal guarantees create exposure gaps, and what happens to individual protection when the entity can no longer indemnify its directors and officers.

A line-by-line policy review with a broker who understands franchise-specific liability is a practical starting point. Understanding coverage limits before a claim arises is considerably less costly than discovering them during one.