Gym franchises sue insurer over COVID-19 shutdown losses

Personal fitness and workout facilities are among the businesses seeking insurance relief in light of the economic hardships caused by COVID-19 shutdowns. It follows that courts are beginning to see business-interruption coverage lawsuits linked to fitness facilities.

Consider the national gym chain Anytime Fitness. Four of its franchisees are suing their insurer for failing to accept such claims. The suit was filed in the U.S. District Court for the Northern District of Illinois.

All four Anytime Fitness outlets named in the complaint are operated by the same company, Fountain Enterprises, and located either in Mississippi or Alabama. The suit alleges breach of contract and violations of the duty of good faith and fair dealing and seeks to represent all Anytime Fitness locations who paid premiums to the insurer and were denied compensation for losses suffered due to shutdowns ordered by state authorities to fight the spread of COVID-19.

All of the 4,500 Anytime Fitness gyms nationwide are insured by Markel Insurance. The policyholders seek a declaratory judgment from the court that their losses should be covered by their insurance contracts, as well as compensatory, punitive and other damages.

The days the world changed

Beginning in March, Alabama and Mississippi gradually shut down non-essential businesses, including fitness centers. The Anytime Fitness centers in the complaint all shut down between March 23rd and April 3. The closures caused a pause in billing for prepaid memberships, adding the lost time to the end of those memberships. The closure also prevented the gyms from signing up new members and ended the sale of fitness-related merchandise. These losses significantly impacted their revenues.

Alabama and Mississippi have begun to allow fitness centers to reopen with restrictions. The locations are no longer 24-hour and are restricted to no more than 30% maximum capacity. The staff is consistently disinfecting and deep cleaning the facilities. Exercise equipment has been moved in order to allocate a six-foot distance between gym-members, and showers, locker rooms, and spa-facilities are closed and fitness classes are canceled for the foreseeable future. Staff members are screened for COVID-19.

Policy language dispute spurs lawsuit

The complaint indicates that Fountain Enterprises and Markel entered into an agreement for an all-risk coverage policy. All-risk coverage should provide coverage for all risks unless specifically excluded or limited by the policy. The policy protects Fountain against loss of business income due to a suspension of operations, and covers expenses incurred in maintaining the business while it is closed and while business is restarting.

The policy contains a “civil authority” provision, which protects the insured in the event that there is no lawful way to reach the premises. Recently with the COVID-19 pandemic, civil authorities prevented access to the business, which is what seems to be covered by the “civil authority” provision. The policy stated “[w]e will pay for the actual loss of Business income you sustain due to the necessary suspension of your operations during the period of restoration.” Not only did Markel deny the claims, Fountain Enterprises alleges that the denial came with implausible swiftness. As stated in the complaint, Fountain made the insurer aware of its losses on April 18 and was notified of the intention to deny payment on April 23, less than one week later. Fountain argues that the swift denial indicates that Markel did not conduct a meaningful investigation of the claims or review of the policy.

The suit goes on to say that Markel’s improper denial was a blatant disregard for the contractual rights of Fountain, resulting in a material breach of Markel’s duties and obligation owed under the policy. The denial effectively deprived Fountain of the benefit of its bargain causing the company serious financial damages.

Related:

• Insurance Speak podcast: Business interruption claims & COVID-19
• Interrupting the COVID-19 business interruption: Now what?
• Top health and safety concerns for reopening businesses