By Donald S. Malecki

With millions of health conscious Americans using exercise as a preventive medicine for a healthier life and perhaps a longer life span, it is no small wonder that so many health clubs or fitness centers have sprung up around the United States. There is no end in sight for these kinds of facilities.

Although some of the health clubs currently in existence are operated by chains, most are run by individual entrepreneurs who see the ownership and operation of these facilities as a "pot of gold" at the end of the rainbow.

There is no doubt that there are opportunities for profit, but there are also numerous obstacles. Not only must the facilities have a lot to offer in terms of qualified staff, equipment, and space accommodations for child care services while one or both of the parents are working out or playing handball, tennis or other kindred activities; but the staff must be trained and well-versed in all facets of the operation of these kinds of facilities.

Depending on the facility in question, qualified people, including nutritionists and masseurs, may be required to counsel attendees on their fitness requirements.

It is not easy to own and operate a health club or fitness center. It takes long hours and a great investment to make the business profitable. The costs of running the business obviously will vary with the nature and magnitude of equipment and staff. One of these concerns is the cost of insurance.

Fitness centers generally require the same basic insurance coverages as other businesses: property coverages, including boiler and machinery; business interruption; crime insurance (employee and nonemployee); coverage on autos; commercial general liability; and workers compensation. The cost of this insurance probably is on par with other business of like risks.

However, what some investors may overlook about this kind of business is that, while it shows promise in growth and profit, it is not the kind of business that insurance underwriters are willing to break down doors to get, particularly liability insurance.

Underwriters' perspective

Underwriters are not fond of the liability risks confronting health clubs and fitness centers. The best qualified staff still cannot prevent someone's being injured. Injuries, depending on the variety and magnitude of activities, are just waiting to happen. Underwriters also are concerned about the cleanliness of these facilities which, given humid and warm conditions, are ripe for the breeding of germs and bacteria. So, a well-rounded liability insurance program may be not only costly, but also difficult to obtain.

In fact, by the time an underwriter has the liability policy issued, it may cover very little from the standpoint of liability protection. One of the endorsements likely to be found on a liability policy written for a health club or fitness center is an exclusion for professional liability.

It does not matter how qualified the technicians may be. No coverage should be expected for injury or damage arising out of the rendering of or failure to render any service or advice relating to physical fitness, in connection with diet, cardiovascular fitness, body building or physical training programs. These professional liability exclusions always are a problem for all businesses that have that risk potential.

The problem is that if someone sustains an injury and files a claim, the professional services exclusion will be one of the first provisions an insurer will rely on to deny coverage. Depending on how these exclusions read, it may be difficult to show that they do not apply. If the same insurer of the commercial general liability policy were to also write the professional liability, there would likely be less argument between the insured and insurer. But having both coverages with one insurer is wishful thinking.

Specialty market candidate

Perhaps the chain-operated health clubs or fitness centers may be more successful in having their insurance needs more readily fulfilled at reasonable cost. However, most such businesses are probably going to find their resting place in the nonstandard market, where these businesses often will have to take what they get, unless some aspiring producer can niche market these businesses with more realistic coverages than might otherwise be available if written on a piecemeal basis.

Underwriters' latest concerns with health clubs and fitness centers is the possible transmission of the acquired immune deficiency syndrome (AIDS). In fact, one of the more recent cases involving this subject and a health club is 12th Street Gym, Inc. et al. v. General Star Indemnity Co., 980 F.Supp.796 (E.D.Pa. 1997).

Briefly, the facts were that a member of the health and exercise club nicked his finger on a locker in the gym. The club's owner was alleged to have shouted, "We do not want your kind in here. . .you're careless and could affect everybody." No evidence was introduced to show that the member actually had AIDS, or that if he had contracted AIDS, he had done so as a result of sexual conduct.

However, in 1994, about 60% of the club's membership consisted of gay men and women of whom an estimated 10% to 15% were HIV-positive or had AIDS. The club also had formerly been a bath house and the club owner knew that the facility might also still be perceived as a bath house--places popular with the gay community in the 1980s because sexual activity could occur there.

In any event, the member filed a suit against the club and its owner. The amended complaint asserted causes of action for discrimination under the Americans with Disabilities Act, as well as stated claims for intentional and negligent infliction of emotional distress, invasion of privacy, fraudulent misrepresentation, civil conspiracy and defamation.

The club's insurer disclaimed coverage based on its "Sexually Transmitted Disease Exclusion." This exclusion read as follows:

This insurance does not apply [sic] "bodily injury," "property damage," "personal injury," "professional liability," or "advertising injury" with respect to any claim, suit or cause of action arising directly or indirectly out of instances, occurrence or allegations involving sexually transmitted diseases, including Acquired Immune Deficiency Syndrome (AIDS). This exclusion shall apply regardless of the legal form any claim may take. As an example, this insurance shall provide no coverage for a claim alleging that any Insured was negligent or in breach of contract by maintaining premises where the Insured knew, or should have known, diseases might be sexually transmitted.

This action was settled with the consent of the insurer and with complete release of all claims against the named insured. The insurer paid for the defense and advanced the cost of settlement, subject to a reservation of its right to contend that it was not obligated to indemnify the named insured.

In concluding that the exclusion was "reasonably susceptible to more than one interpretation," the lower court identified three areas of inquiry about the exclusion:

1. The term "sexually transmitted disease" might encompass all diseases that conceivably could be sexually transmitted, or it could be limited to diseases that have actually been transmitted through sexual conduct.

2. The intended scope of the exclusion is undefined--is the mere existence of a sexually transmitted disease sufficient to trigger the exclusion, or is exposure or fear of exposure to the disease required?

3. More important, what was the required nexus between a claim and a "sexually transmitted disease"?

The insurer's position on appeal was that claims even with a "remote" connection to sexually transmitted disease were excluded from coverage. However, the underwriter's affidavit "delimited" the exclusion in that "it was not [the underwriter's] intention...to exclude coverage for claims in which the involvement of a sexually transmitted disease was irrelevant or purely incidental to the claim...." The opinion was said to characterize the distinction between a "remote" and an "incidental" connection as "potentially" significant.

This case is particularly interesting because it provides the historical background of the wholesaler (Atlantic Star) and its president, who first encountered this AIDS exclusion while employed with another E&S insurer (Essex Insurance Company). Of note, the Atlantic Star's president, who handled this insurance for the club, did not draft the exclusion and did not know the source from which Essex obtained the language. However, the testimony was that since 1986, Atlantic Star has routinely included the exclusion in all policies issued to gyms and tennis clubs.

Exclusion's rationale

The underwriter's explanation as to the reason for the AIDS exclusion was that:

The potential exposure of health and fitness establishments to claims that involve sexually transmitted diseases such as AIDS was large and difficult to evaluate and, therefore, not a risk that the insurer should undertake to insure.

The wholesaler's president further explained:

There are approximately 12 million new sexually transmitted disease cases each year. Health clubs have a lot of exposure because of tanning beds, Jacuzzis, saunas, steam rooms and the numbers of members or guests using those apparatuses or facilities. They could easily have some type of sexually transmitted disease--Herpes or something that thrives in warm, moist environments. It's impractical for a club owner to disinfect every bicycle or steam room after each use.

The court was of the opinion that neither the club's insurer nor the wholesaler appeared to have communicated to the insured or the retailer the insurer's views as to the meaning of the exclusion.

The higher court stated that the underwriter's intention was to have the exclusion apply broadly, so as to bar all claims even remotely related to sexually transmittable diseases--regardless of how the disease, in a given instance, may have actually been transmitted. However, the policy language does not articulate such intent, the court explained, or provide a reasonable basis for reaching that conclusion.

The court explained that, while the AIDS exclusion was ambiguous, this ambiguity could have been clarified by using the word "transmissible"; or, the court added, it could have been drafted in so many words, with no ambiguity, "diseases that were sexually transmitted or are capable of being sexually transmitted."

Based on this court case, chances are that insurers using similar endorsements may take the court's advice not only for purposes of avoiding these kinds of adverse decisions, but also for broadening the scope of coverage.

Producers need to watch out for these kinds of exclusions and point them out to insureds, since they could cut the heart out of most available coverage. Those producers who may be involved in niche marketing of these types of risks also may want to bargain with the underwriters either to see that an AIDS exclusion is not added or that an exclusion more limited in scope be added, such as the kind that was involved in this case. *