Contract Exclusion Bars Coverage for Deceptive Practices Claims Arising Out of Gym Membership Contracts

The United States Court of Appeals for the Sixth Circuit, applying Kentucky law, has held that a directors and officers liability policy does not provide coverage for a class action lawsuit brought against a gym alleging deceptive practices arising from the gym’s membership contracts.  See Global Fitness Holdings, LLC v. Navigators Mgmt. Co., 2021 WL 1884593 (6th Cir. May 11, 2021).  The court of appeals held that the “staggeringly broad” language in the contract exclusion barred coverage for each of the seven claims asserted against the insured.

The insured, a gym and fitness club, was sued by a putative class alleging that the gym made misrepresentations while selling membership contracts, overcharged customer accounts, and made cancelling the contracts “as difficult as possible.”  The class asserted seven claims under Ohio law, including claims for false and deceptive consumer practices, unjust enrichment, and breach of contract.

The gym’s liability insurer declined to defend the gym in the class action, asserting that coverage was barred by a contract exclusion, which excluded coverage for claims “based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any liability under any contract or agreement; provided, however, that this exclusion will not apply to the extent [the insured] would have been liable in the absence of such contract or agreement[.]” 

The Sixth Circuit agreed with the insurer, rejecting the gym’s argument that the exclusion did not apply because of a “severability of exclusions” clause.  The court found that, although the class action alleged wrongful acts only by lower-level employees, the allegations were that the gym itself set harmful policies – the claim was not for vicarious liability of the gym’s lower-level employees.  Second, the court held that the exception to the contract exclusion, which carved out coverage where the insured would have been liable in the absence of such contract or agreement, did not apply.  The court characterized the contract exclusion as “staggeringly broad” and found that each of the seven counts alleged by the class related to the insured’s contracts with its members.  According to the court, “[a]bsent these contracts, that class action could not have been brought, which forecloses [the insured’s] reliance on the exception to the exclusion.”