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Business Without A Safety Line?

A lot of health club owners walk around all day dangerously close to the edge. No, they aren't dangling from a rock wall without a safety line, but they are taking just as great a risk with their business by being underinsured. Sure they have the required liability insurance and workers compensation coverage, but they carry little else. In essence, they're hoping that nothing happens on their premises that their current insurance policy can't cover.

This perpetual state of living on the edge is called being “self-insured.” More health club owners are self-insuring than should be, and the reason is simple: money.

“For the most part, our industry is a struggling industry,” Ken Reinig, president and owner of Association Insurance Group in Denver, CO, says about the health club industry. “They can't afford to be down more than one month without going out of business. They learn where to cut corners.”

However, insurance may not always be the best place to cut those corners.

“In all the years I've been insuring health clubs — 17 years — I've never had one club at the time of a claim say ‘Ken, you sold me too much insurance,’” Reinig says. “On the flip side, invariably club owners do not protect all of their exposures and don't buy enough insurance, especially in loss of business income protection.”

Cheryl Meyer, senior account representative in the Recreation Division of K&K Insurance in Fort Wayne, IN, agrees. “Insurance isn't something a lot of people want to talk about, but it is vitally needed,” says Meyer. “Those who've had a claim know that it is important.”


The only insurance that clubs in most states must carry is workers compensation. However, club owners who own their buildings generally are required by their lenders to carry property and liability insurance. Club owners who lease their space usually are required to carry the same by the building owners.

The cost of coverage depends on several factors. Some insurance companies base premiums on the square footage of the club while others base it on revenue produced from membership. Regardless on what the coverage is based, where the club is located also plays a part in the cost. Clubs in the Northeast, where lawsuits are more common and payouts are generally larger, often will pay more for insurance than clubs elsewhere. In fact, Reinig says that some New York clubs pay $50,000 a year in insurance where clubs in other parts of the country may pay as little as $5,000.

At a minimum, health clubs should carry business and personal property insurance and liability insurance, Reinig says. Business and personal property insurance replaces the purchase cost of equipment and furnishings. Liability covers the owner's liability and the professional liability of staff, trainers, nutrition counselors, massage therapists and others who are employed by the facility. Independent contractors must carry their own liability insurance. Club owners need to make sure that independent contractors working in their clubs have a certificate of insurance that names the club as an additional insured.

Reinig, whose insurance company bases premiums on square footage, says that a typical 15,000-square-foot club that generates about $1 million a year in revenue, leases its space and has $500,000 in furnishing/equipment coverage, $250,000 in business income protection and liability insurance would pay about $4,500 to $5,000 a year in premiums.

Meyers at K&K Insurance, which determines premiums based on membership revenue, estimates that an average multiservice club would have an $8,000 to $12,000 a year premium. Multiservice clubs generally run more in premiums than weight-only facilities because they have more exposures, or possibilities for claims.

The difference in these estimates shows that club owners settle on an insurance company they must make sure they are comparing apples to apples or they could go with a company offering a lower premium even though the higher premium may have been for more coverage.

Under property coverage, a lot of club owners elect not to cover loss of business income, Reinig says. This decision could come back to haunt the owner because a fire can put a club out of business not because of equipment lost but because of revenue lost while the club is closed for repairs. Reinig suggests that clubs insure themselves for four months of revenue under business income protection coverage.

Business income protection is relatively cheap, averaging about $500 a year for $250,000 coverage for the typical club Reinig noted previously.

On top of liability and property coverage, clubs that have employees must carry workers compensation. Cost for this coverage varies greatly by state. California, where the litigious atmosphere is high and laws protecting employees are more liberal, is the most expensive in which to carry workers comp, costing nearly 6 percent of payroll. West Virginia is one of the lowest with 1 percent of payroll.

Employment practice coverage, which covers sexual harassment, wrongful termination and discrimination of employees, is an up-and-coming area of litigation that clubs should consider carrying, Reinig says.

Employment practice coverage runs about $2,500 a year for the club in Reinig's example above with $500,000 worth of coverage and a $5,000 deductible.

“Most club owners elect to self insure this area,” Reinig says.

Another area that many clubs don't insure enough for is key person life insurance, which is important in clubs with more than one owner. When one of the partners dies and his or her family does not want to maintain his or her share in the club, then it places a tremendous strain on the surviving partner or partners to buy out the family of the deceased partner. Even a medium-sized club can be worth $1 million, Reinig says. That could mean a surviving partner would have to come up with $500,000.

“It could force a sale to pay off the family members,” adds Reinig.

The cost for key person life insurance is relatively cheap, running about $400 a year for a $500,000 policy on a 35-year-old male. The cost increases a bit as a person ages, but generally it's guaranteed not to increase for 10 years, which is longer than most partnerships last in this industry, Reinig says.

Club owners also can purchase key person disability coverage. It costs considerably more than key person life insurance because a person is 10 times more likely to become disabled than dead. Disability coverage could cost about $3,000 a year for $500,000 coverage on a 35-year-old male. For that reason, most club owners elect to self insure in this area.

Club owners also need to ensure they cover themselves during the course of construction of a new club. Reinig knows of one club owner in Georgia who didn't get coverage for his club during its construction phase because the club had not opened yet, but an electrician doing work on the building fell and was killed. The accident caused the club owner to go out of business before the club even opened.

“As soon as they sign the lease, they are open to exposure,” Reinig says

In addition, if a club owner is leasing space but is remodeling the inside at his or her own cost, then the club owner may want to purchase tenant improvement and building coverage, which covers what he or she installs after moving in. The tenant will have to name the landlord as an additional insured on the policy.


All of these figures may scare some club owners who think that nothing will happen at their clubs, but the odds are against that. A health club could have some form of liability litigation once every three years, Reinig estimates. Reinig has analyzed the claims of the 1,600 clients he had from Jan. 1, 1999 to May 1, 2002 to determine the causes of most claims and the payouts on each. He found the most common liability claim to be member malfunctions, which means there's no defect in the equipment, but a member injures himself or herself. Despite the apparent lack of fault on the club's side, Reinig's company paid out an average of $7,638 per claim in member malfunctions.

The next highest number of claims came in equipment malfunction, followed by slip and falls inside and outside facilities and treadmill accidents. However, drownings (of which Reinig had four during that time period) paid out the most per claim at an average of $135,100 each. The four tanning-related claims his company received during that period had the lowest average payout at about $780.48 per claim.

As far as property loss is concerned, the largest number of claims came from theft with 37 claims reported and an average payout of $3,117.97. The second largest is water damage, with 23 claims and an average payout of $3,390. The highest payout, however, came from terrorism (due to Sept. 11) at five claims and an average payout of $35,477.91 each. Without the terrorism claims, wind (from hurricanes, tornados and high wind) would have come in first with 16 claims at an average payout of $34,550.93 each. Loss from fire is actually very low with only 10 claims at an average payout of $9,791.20.


So, how do club owners cover themselves without paying an arm and a leg? Well, for one, they can turn their clubs into women-only clubs. These clubs are typically an excellent risk because women “don't have the testosterone levels to cause injuries to themselves,” says Reinig, who is not only a certified insurance counselor but also owner of Women's Workout Co. in Lakewood, CO. Many equipment malfunctions are caused by the user going overboard. Women usually exercise more in control, so they are less likely to be injured. In addition, at a one-gender club, there are only one set of lockers and one shower area to cover against slip and fall claims.

Most important, women-only clubs are better at creating a “Cheers-like” atmosphere where everyone knows your name, Reinig says

“Friends don't sue friends,” he says. That's why Reinig's company won't cover larger chain clubs. He says it's difficult to create a “family” atmosphere in those clubs because of high employee turnover, high-pressure sales and the large, sometimes impersonal feel. Injured members who don't know the staff and aren't known by the staff but remember being high-pressured into joining are more likely to sue than someone who chats with the front desk person and the trainers each day and considers them friends.

“Once a club gets to the point where they don't have that Cheers-like atmosphere they've crossed into the Litigation Zone,” Reinig says.

If a women-only approach doesn't work and the atmosphere doesn't smack of Sam, Diane and Norm, then the next best thing a club owner can do is ensure that he or she has shopped around for the right insurance coverage, company and agent (see “What to Look For” on pg. 20).

All of those elements must work together in order for health club owners to feel secure in their insurance and to finally walk around with an insurance safety harness firmly attached.

What to Look For

Before picking an insurance policy or an agent, you should find out a few things about both. You can find the right insurance carrier, but if you don't have the right agent, you may not get the right coverage. In addition, you can have a good agent, but he or she may not know the right carrier for you. So, do your homework and check out both the carrier and the agent before going with anyone.

  • Here's what to look for in an insurance carrier:

    Find one that specializes in health clubs. An insurance company that specializes in health clubs often offers enhancements designed specifically for clubs. A generic policy from a non-specializing insurance company may have coverage exclusions that could cost you more if you have a claim. Also, because these companies are not as familiar with health clubs, they don't understand their unique exposures. The claims agents at insurance companies that specialize in health clubs are more knowledgeable about exposures and can more effectively handle claims.

  • Here's what to look for in an agent:

    Make sure the company is A-rated and licensed. This rating should help guarantee that the insurance company is financially strong.

  • Health Club Property Claims Analysis Jan. 1, 1999 - May 1, 2002

    Ensure the carrier has been around for a while. That “staying ability” shows the company isn't a fly-by-night operation.

  • Health Club Liability Claims Analysis Jan. 1, 1999-May 1, 2002

    Find one that represents other clubs. It's rare to find an agent that represents only health clubs or gyms. However, if you can find one that represents a few health clubs, you will be ahead of the game. Often, agents are brokers who can pick from several insurance companies. Make sure your agent works with an insurance company that specializes in health club insurance.

    Rising Cost of Insurance

    Andrea Pugliese, president of Andrea Pugliese Insurance Services in Warrington, PA, is a broker who has represented just the health club industry for 18 years. She says that experience is important because agents with her experience can more easily and quickly answer questions than agents who have no or little experience with health clubs.

  • Go with an agent that is in your region. Customer service is better if you have an agent nearby who can stop in to see the health club occasionally. Your agent should walk through your facility and talk to you about your needs and explain the exposures they see prior to writing your policy.

  • Find an agent who will take the time to explain your coverage and to help you re-evaluate it. “Insurance scares people,” says Pugliese. “Once they take out a policy, they never stop to re-evaluate it or have someone explain their coverage.”

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