Our Client’s Problem
The insured, a fitness club, had been experiencing declining membership for two years leading up to a series of sewage overflow incidents that closed all or part of the facility several times in a four-month span of time. Our client determined the losses were covered, and the insured asserted a claim for lost business income. The insured acknowledged that memberships had been declining, but could not pinpoint the reason for the decline. Nevertheless, the insured was certain that the problem had been resolved and, but for the sewage overflows, membership would have at least remained steady, if not increased. We were hired to verify the amount of lost business income supported by the insured’s records.
Robson Lenhart, PC’s Approach
After analyzing the insured’s membership “inventory” and changes in membership over several prior years, we observed a declining seasonal pattern that continued through the period of restoration. At first look, it appeared the membership losses during the months of the water damage would have been incurred anyway. We proposed that the insured allow us to poll a sample of members that left during the period to find out their reasons for leaving. We developed a “member satisfaction” survey that asked the departed members to rate various aspects of the center’s facility and services, to rank them in importance in their decision to leave, and to provide any additional comments they wanted to offer. As a result of the survey, we determined that although they did not like the conditions caused by the sewage overflows, only a portion of the departing members considered that a primary factor in their leaving. Instead, we learned that the facility had for some time experienced recurring problems with its air conditioning system making it an uncomfortable place to work out. We also learned from several female members that one of the male trainers had been making unwanted romantic overtures, causing them to resign their memberships.
The Result
As a result of our analysis, we computed a business interruption loss that included only losses in which the sewage back up was a significant factor in members’ decisions to leave. We, of course, included a reasonable allowance for “on-the-fence” members, who may have considered the sewage overflows the “last straw”. The amount we calculated was not as much as the insured wanted, but they accepted it after some discussion. The insured’s manager, who already knew about the air conditioning problem, was pleased to learn about the problem with the male trainer, so she could deal with it.