Because fitness centers face myriad liabilities -- from the minor to the catastrophic -- insuring against those risks can be quite complicated.

The way Jon Denley tells it, if most health club operators aren't downright scared senseless, they should be.

Denley, senior vice president and national program manager for Creative Agency Group, a Holmdel, N.J.-based insurance firm, offers a laundry list of reasons why, in comparison to other businesses, health clubs are particularly risky ventures. "The problem with the industry is that it does too many things," he says. "It's not like Macy's department store. Your hazard in Macy's may be a slip and fall because some floor was mopped and is wet. You go into a club, you have the slip-and-fall hazard, but look at how much else you have to worry about -- rock climbing, swimming pools, saunas, steam rooms, weight machines. You have clubs that hire nurses who do health screenings. Personal trainers could be implicated in sexual harassment claims."

The latter type of risk, a severity claim, can virtually crush a club, as was apparently the case when in 1999 the widower of a Crunch Fitness member brought against the chain a $320 million wrongful-death suit. A personal trainer at the New York Crunch franchise to which the victim belonged prescribed her over-the-counter supplements, one of which contained ephedra and allegedly caused the victim to suffer a fatal stroke at the club. Although the suit was settled out of court in May 2004 for an undisclosed sum, barely a year later Crunch's parent company, Bally Total Fitness, dumped the chain in a sale to an investment partnership.

Denley suspects that Crunch's new owners will have an easier time procuring affordable insurance coverage than did the chain's previous management. "Obviously, if clubs have one massive claim, like Crunch did, that severity claim would put an account into unprofitable mode for probably six to eight years," he says. "The insurance carrier that paid that Crunch claim is not getting its money back because it's not going to stay on the risk."

The Crunch episode should pass on to club operators at least one critical lesson: Reduce your insurance risk or risk paying the price. And whether that price is paid in monthly premiums or monster lawsuits, both have the potential to bust a club's budget or worse -- to shut its doors for good.

Scared yet?

A Small World

It's not an unreasonable response, especially given the limited selection of insurance carriers available to club operators and the effect such a paucity of competition has on premium rates.

Presently only about a half-dozen carriers are willing to cover health clubs and fitness centers -- this figure down from 50 to 75 companies three decades ago, according to Denley's estimate. Back then, it was profitable for high-profile insurance carriers like AIG to write policies for clubs. Of course, health clubs weren't the all-inclusive sports, fitness and recreation destinations they are today. "Before fitness, it was racquetball and tennis," notes Denley, who began working with health clubs in 1976.

But by the mid-1980s, the fitness industry's boom was well under way and the AIGs of the world, no longer able to turn a desirable profit off increasingly complex policies, got out of the business. Another industry veteran, K&K Insurance Group's chief marketing officer Lou Valentic, credits the mass exodus of mainstream insurance companies to what he delicately calls the "intricacies" and "nuances" of health club operations -- nuances such as the grouping under the same roof of dissimilar services such as child care and aquatics.

But in Valentic's mind, the exit from the health club industry of big-name insurance companies wasn't necessarily a negative development. For one thing, it allowed midsize companies like his to step in and try their hand at cultivating a vacated niche market. But Valentic says that it also led to the creation of insurance policies specially designed for fitness centers -- and that happened even without a great many carriers competing for clubs' attention. "If you're going to compete in the business, you're going to look at your competitors' policies and see what they're doing," he says. "And in order to compete, you might have to refine your coverage or broaden what you've been doing previously. Very rarely are you able to restrict your coverage."

Valentic says that much of insurance companies' policy experimentation has taken place within the past six to eight years. For its part, K&K has spent that time refining its packaged products designed for for-profit facilities, as most nonprofit fitness centers will not qualify for coverage (for example, the company does not cover facilities exclusively focused on youth fitness, aquatics or climbing).

In some ways, such products are structured much like non-commercial insurance programs. Policies are valued according to payout limits provided for 1) each occurrence of an act that is insured against and 2) an aggregate of costs from separate acts occurring within the same year.

Packaged commercial programs for health clubs often offer comprehensive property and liability coverage. Generally in such packages, liability coverage encompasses services ranging from general (slips and falls, use of exercise equipment) to specific (tanning). Liability coverage can also be extended to automobiles owned and operated by a club. As might be expected, property insurance policies cover a club's premises (if owned) and contents, including fitness equipment, office supplies and data records. Off-premises property can also be covered under such policies.

Robin Tourney, a recreation unit underwriter with K&K, recommends that club operators give serious consideration to including in their insurance packages business income coverage, which kicks in to essentially pay the bills when business operations are unexpectedly suspended by qualified events such as fires or natural disasters. A note of caution: Beware of making the mistake of many club owners who purchase too little coverage. "If you have $3 million in annual receipts, a $100,000 policy is not adequate," says Tourney. "It's your agent's responsibility to help make sure that the insured business is adequately valued."

Premium costs for packaged policies can vary greatly depending on the size of the club. According to Denley, a so-called mom-and-pop operation (say, a Curves or Cuts franchise leasing less than 5,000 square feet of space) will typically carry a $1 million annual limit each on its liability and property policies. In addition, it will insure its business contents for $25,000 and carry $25,000 in business income coverage. For this level of protection, a club operator can expect to pay $1,100 a year.

A club leasing 15,000 square feet of space and boasting about 3,000 members will likely carry a $1 million liability policy and insure its property for anywhere from $1 million to $2 million. Add to that a business income policy with a limit of $500,000, and that club's annual premium will cost somewhere between $12,000 and $15,000.

For larger clubs (up to 6,000 members) that own their own buildings of 40,000 square feet or more, packages affording liability coverage of $1 million per occurrence and $2 million in annual aggregate costs will run $50,000 a year.

But these are simply averages. Premiums can be affected by a number of variables, not the least of which is location. "Without naming any, there are certainly states that pose litigious issues for any insurance company, especially from a liability standpoint" because of particularly strict state laws, says Valentic. "The other side of that coin is that there are certain states that pose certain property exposures that other states don't pose. The hurricane season offers a perfect example of that. If you're a health club within so many miles of the coast in any state -- Florida, Mississippi, Louisiana, Texas, California, South Carolina, North Carolina -- you have a different property exposure than a health club here in Fort Wayne, Ind. There are different underwriting considerations for properties located in weather-prone areas."

Coverage also can vary depending on the resources of the carrier backing the policy. It's generally agreed upon by industry observers that Philadelphia Insurance Co., currently the largest insurer of health clubs, can afford to assume the risks of smaller facilities -- whose low-premium policies are unlikely to reap profits. But while Valentic says his company has a "sizable health club book of business, from the premium standpoint, in the millions of dollars," K&K isn't willing -- at least not at this time -- to take on exposure for a policy that doesn't generate an annual premium of at least $5,000. "It's difficult to individually underwrite risks that are going to generate $2,000 or $3,000," he says, citing the costs of underwriting, rating, policy issuance and claims handling, all of which is done in-house at K&K.

Custom Fit

In addition to basic coverage provisions, there is an entire category of add-ons that policyholders can use to customize their insurance policies. Generally, this is the avenue through which high-profile companies unwilling to sell comprehensive programs to health clubs -- companies such as The Hartford and St. Paul Travelers -- enter the market.

One can see why, especially with respect to worker's compensation policies, which have proven to be among the most profitable programs for health club insurers. "I think it's because of the employees clubs hire. They're young, in shape and non-smokers," says Denley, emphasizing the unlikelihood of such individuals missing significant work-time due to serious illness or injury, although "time and again, even a healthy employee will suffer a catastrophic loss."

Another add-on, umbrella liability insurance, covers expenses above and beyond a policy's liability limit, a limit that can easily be reached and surpassed in severity claims. For that reason, Denley recommends that clubs carry $4 million in umbrella protection. "When you look at a claim on a per-occurrence basis, that's just one occurrence," he says. "If one person is injured on the one occurrence, is a $2 million umbrella plus your $1 million primary liability coverage enough? Probably. But if two people are injured as a result of that occurrence, it's not."

Generally, insurance carriers offer such protection in $1 million increments for $1,000 each. Depending on the size of the carrier, a club can purchase as much as $100 million in umbrella protection. Philadelphia Insurance offers a maximum of $10 million. Meanwhile, companies like The Hartford and St. Paul Travelers have the capacity to underwrite a $50 million umbrella policy.

Other companies offer excess liability coverage, which traditionally differs from umbrella insurance in several ways. First of all, excess liability insurance overlays a specific liability insurance policy that an organization already owns by increasing per-occurrence limits of liability in that particular policy, and second, it incorporates all the provisions of the specific underlying policy. However, excess liability does not alter any other liability insurance policies already held by an insured organization.

Umbrella liability insurance, by contrast, overlays most of the major policies in an organization's liability insurance program, increasing the limits of liability in each of the liability policies in that organization's program. It also typically offers broader coverage, with few exclusions or limitations and more liberal definitions than the underlying liability policies in the organization's program. Umbrella coverage also "drops down" to provide first-dollar liability coverage (above any "self-insured retention" or other deductible) in many (but not all) areas of potential liability for which the organization has no other, more specific, liability coverage.

For such reasons, traditional umbrella insurance policies cost -- and are typically worth -- more than excess coverage. But in recent years, the distinguishing characteristics of each type of protection have become less noticeable. For example, some insurance policies with "excess" in their titles now increase policy limits for several underlying policies, not just the traditional single policy. And some so-called umbrella policies have no drop-down feature like those that had filled in many coverage gaps within and between primary policies.

One final policy add-on that has drawn much attention this past decade is employment practices liability insurance (EPLI). Usually available for purchase with directors and officers (D&O) policies or as stand-alone products, first-party EPLI insures clubs against employee-to-employer claims of wrongful termination, sexual harassment and discrimination. Also available is third-party coverage, which provides for claims made by members against club employees, including those involving sexual harassment. First-party and third-party EPLI can be purchased separately or together. "If you buy EPLI with a $1 million limit, most carriers that write policy will include the defense costs in that limit. So you could have $250,000 in attorney's fees and $750,000 left for settlement," says Denley. "Three or four years ago, I couldn't sell an EPLI policy to any of my clubs. Now, most -- say, 75 to 80 percent -- of my clubs have EPLI."

While Valentic attributes the growing popularity of EPLI coverage to lowered premium rates, he also points to the club industry's increased efforts to protect against individuals with criminal backgrounds who somehow get hired. "The screening of employees in child-care operations is certainly something that's prevalent now and an important risk-management concern of every business owner," he says. "You want to make sure that they are the type of people you would want watching the sons and daughters of your customers."

Independent Means

Many clubs also employ a number of fitness instructors and personal trainers on a contractual basis. While a club's professional liability, D&O or EPLI policies will often insure it to a certain degree against claims involving independent contractors, the contractors themselves -- unless they carry their own insurance policies -- are quite vulnerable.

To that end, K&K offers a program specifically for independent contractors who work at fitness centers and health clubs. The program -- which is currently used by more than 8,000 independent contractors -- is available in three liability coverage options, starting at $200 a year. That premium level affords $500,000 in protection per occurrence and $1 million aggregate (each policy option also includes $5,000 for medical expenses and $300,000 for damages to premises rented by the insured).

Obtaining coverage is fairly simple, as the fitness instructor program circumvents the individual underwriting process. "It's a canned, cash-with-application program," says Valentic. "It's underwritten as a group, so you simply have to fill out the information, enclose your payment in one form or another, and you have coverage, literally the next day."

Another hook with this program is its variable pricing, with different premium rates assigned to uncertified and certified fitness instructors and personal trainers. Certified individuals receive, on average, a 17 percent discount. According to Catherine Frye, K&K's business unit leader for mass-merchandised programs, the program accepts certification from at least 20 different certifying organizations in disciplines as diverse as personal training, yoga and Pilates. "Clearly, there is a difference between a certified and an uncertified instructor, with respect to insurability," she says. "Usually part of any certification process will include some component of CPR certification and first-responder care. So I think certified people are really better prepared in case there is an incident that occurs in a class that they're supervising or while they're working with a client in a personal training environment."

K&K isn't the only company to see the value in third-party certification. At last month's Club Industry show in Chicago, Philadelphia Insurance unveiled a new program (insureyourclub.com) that offers a 5 to 10 percent discount to clubs that contract with fitness instructors and personal trainers certified by any one of the three certifying agencies accredited by the National Commission for Certifying Agencies -- the American Council on Exercise, the National Strength & Conditioning Association and the National Council on Strength and Fitness. For the discount to apply, at least 50 percent of a club's contractors must be certified.

"Insurance companies are now saying that they can't take one big hit like Crunch," says Rick Caro, president of New York-based health club consultancy Management Vision Inc. "They want to make sure there's a way to prevent or limit their exposure. They can do that by giving credits and sending out the right signals that say, 'Get your people certified by the right people, and we're going to feel more comfortable giving better rates.' "

Absolute Uncertainty

Observers might applaud the efforts of insurance companies like K&K and Philadelphia to create programs that address today's major industry concerns.

But what about clubs' needs -- and risks -- of tomorrow? That's another story entirely.

In fact, there is even disagreement among K&K's staff as to what will be the great insurance risk of the near future. While climbing walls make Valentic really nervous, youth fitness programs put Frye slightly on edge. "Because of the increased awareness of childhood obesity, we're seeing more and more fitness programs dedicated to elementary school-age kids," she says. "The circuit training industry is designing equipment specifically for children. We've been working a lot with manufacturers who are looking for insurance resources for the people who buy this equipment and want to set up circuits."

Denley is similarly ambivalent about the future, although his concern lies with automated external defibrillators. Though a supporter of AEDs, Denley admonishes clubs that purchase them to be diligent in the training of all employees in the equipment's use. "I'm for them 100 percent, and I think you should have them there," he says. "But are you vulnerable to a potential suit if you don't use the unit correctly, or if you don't use it at all? Absolutely."

The reason for Denley's caution? Another tragic episode, this one taking place 15 years ago at a tennis club that failed to properly administer oxygen to a member suffering a heart attack. "They called the ambulance, they administered first aid, they did everything correctly," he says. "But the gentleman died, the wife sued and she collected $250,000 under incidental malpractice, which is part of liability coverage, for failure to render first aid. And here's why: The club had an oxygen tank behind a locked door and did not use it. Had the club used it and the individual died, it still probably would have been held negligent for improper use."

So will club owners forever have to be on their toes -- or will they ever catch a break?

Perhaps. The future could bring more players to the health club insurance market. But whether such increased competition for club owners' business will help alleviate the demands on them to decrease their liabilities is anyone's guess. For his part, Denley declines to offer any predictions. "I would hope so," he says. "But I don't have a crystal ball."