Owners of gyms, health studios, or athletic clubs commonly have people signing up for long-term prepaid memberships. Many states utilize a surety bond as a way to financially protect the members.
Jet is a third-party guarantor that provides the bond as a promise to the State that gym members will receive a refund should the gym owner fail to fulfill their requirements. At the same time, Jet looks out for the owners by ensuring any claims against them are legitimate and due to a breach of contract before making payment.
Bond Claim, How Do I Avoid That?
The easiest way to avoid bond claims is to make sure that a refund for any amount unused will be given to prepaid members if you are closing your gym down. Refunds are typically entitled to members that have an extended contract, not those on a month-to-month basis. Not so easy if a business is going under, so a plan must be in place for this occurrence, and health studios should track how many prepaid obligations exist at any given time.
Surety bonds will typically have broader coverage than their intended purpose mentioned above. For health clubs, license violations that can result in a bond claim are centered around members being financially damaged. The following list can lead to a claim:
- Not refunding after a business close or bankruptcy (may include moving location)
Not refunding a member if they move to a new location
- Not refunding during a ‘cancellation’ period shortly after contract signing
- Not refunding a member if they become disabled or dies
- Not refunding a member when the organization misrepresented an offer
Unlawfully charging of fees
It is all about giving a refund according to the terms of your health studio license and contract. So just doing that can stop any claim on the Health Spa Bond in its tracks.
Period of Liability of a Bond
A surety bond will allow for claims to be filed within the bond’s active period. If a bond is cancelled, new claims can still be filed within that 30-60 day period (as prescribed on the bond form). States allow this active period to further protect consumers should a health studio owner attempt to cancel the bond suddenly or fail to renew their bond.
Some states will allow for an even longer extended period once the bond is cancelled for prior transgressions. For example, the Texas Health Spa Bond must be maintained up to two years after the closure of the health spa or until the Secretary of State finds all claims to be satisfied or foreclosed by law.
Claim Amount Not to Exceed Bond Limit
There is a bond limit or penal sum set at a maximum amount that can be paid out for any bond. The bond limit varies from state to state and can either be a set limit or based on the number of prepaid memberships. Different states will have different required bond amounts based on what each individual state believes is sufficient to cover the risk to prepaid members.
However, if there are multiple claimants and the total amount of all their claims exceeds the bond limit, no more will be paid out by the surety company (Jet).
With this bond, it is likely that there is more than one claimant, so how claim funds are distributed is important. Surety companies must take care to make claim payments according to state regulations which may be unfair to those who make claims later than others. In some cases, like with the Florida Attorney General, the State will collect money from the surety company and distribute the funds to damaged parties equitably (or at least equitably in the state's point of view).
Health Club Bond Claim Process
Once a gym or health spa closes, the owner is obligated to refund any long-term contracts to the gym members since there is a portion of the contract that cannot be fulfilled. If the gym owner fails to provide a refund, the gym members will file a complaint with the local court or obligee (aka the regulating agency in charge of the health studio licensing).
In Texas, SupaBuff Fitness (a fictional gym we’ll use for an example) has a popular promotion for a 2-year membership, paid in full at a discounted rate. But, the owner of SupaBuff Fitness (let’s call him Jim) can no longer sustain the gym/health spa after a year and closes down. The members who had purchased the 2-year membership have suffered damage as they paid for another year of getting buff. Jim is obligated to refund the members for the unused time. If Jim isn’t able or unwilling to, the members can seek compensation elsewhere. They can go to the local court or in Texas to the Secretary of State.
The court or regulator will investigate the complaint. Any evidence available should be submitted for review, such as proof of refund to be used as a defense.
Once the Secretary of State investigates the complaint, Jim has an opportunity to provide a defense. He can provide proof of refund to dismiss the complaint, if available.
If the investigation finds that the gym owner did not provide a refund as instructed, a final order will be issued for the gym owner to complete the refund. The gym owner will have a chance to alleviate the complaint by simply refunding the money; or if not able to, action will be taken against the Health Spa Bond.
After Jim receives a complaint from members who didn’t receive a refund, he can mitigate the issue by actually providing the refund. This is Jim’s second opportunity to do the right thing and provide a refund for the long-term contract—but Jim cannot provide a refund so a claim on the Health Spa Bond is filed.
Recovery and Indemnification
Once a claim on the Health Spa Bond is filed, surety companies must pay out damages to the obligee or affected gym members, according to the bond’s terms. Some bonds will direct payment straight to gym members, while others may pay the Obligee to distribute amongst gym members at its discretion.
After payout, the gym owner will need to pay Jet back, as would be the case with any other surety company. The nature of a surety bond allows the surety company to compensate the injured party on behalf of the principal (gym owner), who is still liable for breaking the conditions of the bond. As such, the gym owner would need to pay the surety company back.
In Texas, gym members can only file a claim on the bond to be refunded for incomplete contracts, not for disputes about business practices, with the claim amount being based on actual financial loss. If the amount of claims exceeds the bond limit, the bond claims shall be paid out to the Secretary of State to distribute refunds on a pro-rata basis.
Jim will need to pay Jet back following a Health Spa Bond payout. He is still bound to the terms of the bond, which includes paying Jet back following a claim payout.