Head-On Collision

When Stephen Strasburg, the Washington Nationals’ rookie pitching sensation, went down with a shoulder injury last August that required season-ending Tommy John surgery, he need not have worried about his cash flow. That’s because the powerful right-hander’s $15.1 million deal was the largest guaranteed contract ever given to a drafted player. Strasburg’s salary was paid in full through the 2010 baseball season and will continue to be paid, even if he never returns to the mound.

Yet while Strasburg suffered physically—now in rehab, he is unlikely to throw a major league pitch this season—the Nats will continue to suffer financially. The team faces not only the huge salary liability for a player who cannot play, but lost revenue from the sale of tickets, merchandise and even beer and hot dogs. The lost revenue is an unfortunate development for the team, not covered by any sort of business interruption or other insurance. But it is possible that the Nats have some relief on the salary front if they purchased disability insurance on Strasburg when they agreed to his four-year contract.

Did they buy disability insurance to cover a portion of his salary should an injury occur that would knock him off the field for a significant period of time? If they did, how much of the contract does it cover? Under what terms? How long will Strasburg have to be out before the policy would give the Nats some salary relief? The answer is: Who knows?

The Nats did not return a phone call inquiring about disability insurance for Strasburg. And no one, from commercial brokers who would have gone hunting for the coverage to insurers that would have written it, will discuss it—even off the record.

“It was easy to see what a significant revenue asset he was. I’ll leave it at that,” says Bill Hubbard, chairman of HCC Specialty Underwriters, of Wakefield, Mass., which writes more than 50% of the disability insurance for professional sports teams and individual athletes.

The reason this information is held so closely goes beyond standard privacy and confidentiality concerns. Blame instead the combination of a highly competitive sports industry and an insurance market facing capacity problems due to the monumental salaries and increasing risk of injury in professional sports these days.

“This is exceptionally highly guarded information,” says Robert Murphy, head of Marsh’s sports industry practice group, a dominant broker in crafting sports disability packages for teams whose megastars generate millions of dollars in revenue–but only if they play. “These teams are all competing against one another. Because the marketplace is so challenging for this coverage, no one is going to tell you.”

In many ways, the challenges of insuring professional sports are similar to insurance requirements faced by any industry. The teams need business interruption insurance to cover situations such as the San Francisco earthquake that disrupted the 1989 World Series or the massive blizzard last December that resulted in the collapse of the roof of the Metrodome in Minneapolis and forced the Minnesota Vikings to move their final regular season games to different locations. They need automobile insurance as well as property and liability coverage to protect against both facility damage and personal injuries to fans and employees. And they need policies highly specialized for their business, such as insurance to protect the lucrative income flow from national television coverage and sponsor payments for stadium naming rights.

But there is no other industry where disability insurance plays such a significant role.

“If you have a venue or an arena, and it is damaged, you can always go play elsewhere,” Murphy says. “But if you have your major players injured for a significant time, it is very difficult to replace them.”

The handful of insurers writing disability insurance for professional sports teams and individual athletes dispute suggestions that there is a capacity crisis in the disability market, saying only that the market is “challenging.”

“It is not simple to place the dollar amounts of coverage that teams or leagues need these days, but it can be done,” says Dan Burn, president of Pro Financial Services, which along with HCC Specialty Underwriters, is the other major writer of team disability insurance. “You have to make sure you approach the right people and structure coverage so it is equitable to both the team that is placing the coverage and the insurance market that is taking the risk.”

“As amounts get bigger, it is harder to satisfy 100% of a team’s needs,” Hubbard says. “There is at any point in time not enough capacity to satisfy a team’s needs on an individual contract. But I would not say there’s a capacity crisis.”

But Marsh’s Murphy disagrees. He says there is no question that a capacity crisis exists.

“There definitely is one, and we have had one for quite some time,” Murphy says. “To put it in simple language, it is just becoming increasingly difficult to obtain disability coverage at reasonable prices if at all. Teams are being faced with higher premiums, lower limits, shorter policy terms and more restrictions at the same time contracts are increasing in value. If you look at some of the top contracts signed lately, we are talking about contracts potentially in the hundreds of millions of dollars.”

The problem is that the value of the contracts now being signed in pro sports is so great that no disability insurer is willing to insure the entire contract, and there are not enough insurance companies writing disability insurance to take all the pieces of risk.

“Because very few insurance companies are willing to cover these risks, there is very little spread of risk, and the disability insurance marketplace has not been able to keep up with the growth of these contracts,” Murphy says. “It is exceptionally challenging for the underwriters to make an underwriting profit.”

Burn says teams have insured as much as 90% of a player’s contract. But in recent years, he says, “the average is probably closer to 60% and has stayed pretty consistent.”

In his experience, Murphy says, teams have found disability coverage for no more than 40% of the contract value for those select players whose contracts are worth $100 million or more.

Of course, another issue is whether teams can afford the premium even if they can find coverage.

“You have assets that are worth a tremendous amount of money, and they break down—often,” Hubbard says. “The premiums are commensurate with the risk.”

To figure the risk, insurers that have survived in the highly volatile sports disability market rely on a wealth of information to calculate the premium they need to make an underwriting profit. That’s proprietary information, but insurers generally look at the sum to be insured, the age of the athlete, the position the athlete plays, the athlete’s skill level and the player’s future value. For example, a pitcher, especially one who throws a 100 mph fastball, is more expensive to insure than an outfielder because the risk of injury is much higher. In football, a punter is less expensive to insure than a running back, and a running back over age 30 is more expensive than another one fresh out of college.

Depending on the length of the contract and the value of the player, Murphy says, “You are looking at six- and seven-figure premiums” for disability insurance to cover a star player’s salary.

There might also be a long waiting period and a very large deductible before a team could collect. Frequently, the team will have to absorb such a large cost that it is essentially self-insuring for most injuries in exchange for having protection for a catastrophic injury that could end a star’s playing career. 

“As these contracts are getting larger and larger, the insurance becomes harder to place,” Murphy says. “As a result, some teams are basically…willing to accept the loss of a player’s service for a part of the season. They are increasingly willing to accept very significant deductibles both in terms of the dollars amounts and the waiting period. The reason is that sports teams have used disability insurance for quite some time to protect against paying millions of dollars to an athlete who is injured and unable to play. Some of these franchise players are unique and almost impossible to replace.”

A team typically insures only a handful of its players, and usually the only people who know which players are insured are the insurance broker, the underwriter and the team’s management. Often, a team shops for disability insurance when it is at the bargaining table seeking to sign a player or negotiate a contract renewal, and the cost and availability of the coverage will factor into a team’s offer, even though that element is not discussed openly.

Murphy says the purchase of disability insurance by pro teams is “not 100% by any stretch of the imagination.”

“In some sports, such as basketball and hockey, there is coverage for a certain percentage of players on every team,” Murphy says. “For baseball and football teams, that is not the case, and it is on a team-by-team basis. I would say it is about 50-50, but that can vary by season. You can have baseball teams in the off-season that won’t sign any big players and won’t insure anyone, and a couple years later, they will sign a player that they will insure.”

Professional baseball and basketball teams are the most likely to purchase disability insurance on their highest-paid players because those contracts are guaranteed, meaning the player will collect his salary after injury regardless of how long he is sidelined. In football, however, most contracts are not guaranteed, and injured players typically are paid their salaries only for the season in which the injury occurs. But to make up for lack of long-term salary guarantees, NFL players receive large signing bonuses at the start of their contract no matter what happens in that contract year. Richard Berthelsen, general counsel for the NFL Players Association, says half the average $2 million in compensation paid to starting players each year comes from signing bonuses.

Although the financial exposure for the team may be less in terms of salary for football superstars, the need for disability coverage is greater because of the higher frequency of injury.  Simply put, players now are bigger and stronger, and to earn the big bucks, they have to play harder and take more risks. Pro athletes also can purchase their own disability insurance to protect themselves against a season-ending or career-ending injury. Scott Petersen, an athlete account representative with Petersen International Underwriters in Valencia, Calif., says individual disability coverage is more popular with NFL and NHL players due to the nature of the sport and the higher probability of injury.

“The people who buy it are the higher-salaried players,” says Peterson, whose company writes for Lloyds. “Some try to insure their entire contract, but many times the value purchased is more than the contract value due to loss of future earnings.”
Although there may be more capacity problems in team disability insurance, Petersen says, “We are not seeing it on a personal side.”

Not surprisingly, the difficulty in finding adequate player disability coverage at acceptable prices is stirring interest in creating alternative risk financing vehicles, such as a captive, to relieve pressure.

“There are many organizations looking at the alternatives, and a captive is a possibility, but I can’t say how feasible that is and when it could be established,” Murphy says. “The complication with that is that you still have to fund the captive, and who’s going to fund it? You could get all the teams in the league together to pool their resources, but you are talking about a potential exposure on an aggregate basis that is far greater than these teams have the capacity to fund. And even if they were able to fund the captive, you would still have to reinsure, and you would run into the same capacity problems in the reinsurance market.”

Another major problem with the captive approach is that disability insurance is driven by a team’s payroll.

“Take Major League Baseball,” Murphy says. “The difference in spending between the top five teams and the bottom five is dramatic. For example, Kansas City is a small-market place, and they can’t spend anywhere near as much as Los Angeles can spend. And some teams don’t want to subsidize other teams.”

Heading for a Fall

Lurking just below the surface of dangerous head-to-head impacts is a major insurance concern for professional sports—a potential billion-dollar liability for NFL teams and their insurers under workers compensation.

During the past season, a great deal of attention was given to the National Football League’s decision to levy big fines and its threats to suspend players involved in helmet-to-helmet hits in the effort to reduce the potential of serious injuries. Lurking just below the surface of these dangerous head-to-head impacts is a major insurance concern for professional sports—a potential billion-dollar liability for NFL teams and their insurers under workers compensation.

In addition to the immediate revenue consequences of a marquee player being knocked out of the game because of a serious injury, NFL teams face the prospect of massive workers comp liability if it can be shown that repeated head injuries over the course of a football player’s career increase his likelihood of developing Alzheimer’s disease or similar memory-related diseases.

The possibility of serious, long-term brain injury from helmet-to-helmet hits is not a new story. For years, studies have suggested that once a person sustains a concussion, he is more likely to have a second one. After several concussions, neurologists say, a lesser blow can cause a recurrence, and it takes more time to recover.

The NFL commissioned a study in 2009 that suggested former players were being diagnosed with Alzheimer’s or memory-impairment diseases at a rate 19 times greater than the normal rate for men aged 30 through 49. Although the NFL is not acknowledging the link, a workers comp case filed in California—where the workers comp laws allow for claims based on cumulative trauma—is bringing the potential financial liability to the forefront.

The case threatens to further complicate the workers comp market, says Robert Murphy, the sports industry practice leader for Marsh in Philadelphia. Twenty years ago, more than 10 major markets provided workers comp coverage, but now ACE and Berkley essentially control the competitive market for sports teams.

“It is not a buyer’s market. However, if you are willing to work on the insurance company’s terms, you can get it,” says Murphy. “What that means is you take a very large deductible or retention. The average deductible or retention for most sports is closing in on $1 million,” Murphy says.

Since 99% of the claims are below $500,000, the team is basically self-insured and is buying the workers comp policies only for catastrophic coverage for a player who is permanently disabled and never able to work again. Although the maximum weekly benefit is considerably lower than a player’s annual salary, a lifetime of weekly benefits and medical expenses could mean a potential exposure of millions of dollars.

But that pales in comparison with the workers comp liability that could face pro teams if a pending case in California is decided in favor of Ralph Wenzel, a former lineman for the Pittsburgh Steelers and the San Diego Chargers, who has been diagnosed with dementia and resides in an assisted-living facility. The claim, filed by Wenzel’s wife, Dr. Eleanor Perfetto, contends that his dementia is related to his career in the NFL from 1966 to 1973. If she prevails, it could open the floodgates for similar claims from hundreds of former NFL players.

“If they find in his favor, you could be looking at massive litigation by retired players, going back decades, claiming the same thing,” Murphy says. “You could be looking at what we and a lot of people project is ultimate expenses in excess of $1 billion. Ten years ago, no one was talking about concussions or brain trauma. You were talking about knee ligaments, shoulders and ankles. To be honest, brain trauma could be identical to asbestos for the manufacturing industry.”

The case is also important because California’s workers compensation system allows former players who have not played for California teams or who are not residents of the state to be eligible to file claims for medical care and support, even if they only participated in one game in the state or practiced there at some point in their career. And the benefits available under California law are significantly more favorable than in many other states as well.

“Workers comp is the only post-career coverage for football injuries if a player is injured and has to leave the roster,” says Richard Berthelsen, general counsel for the NFL Players Association. “The contract says if he is hurt, the team will continue to pay salary for the year of the injury. The same for providing medical care. But as a practical matter, if a player can’t play the next year, his contract is terminated, and he has to file for workers comp to get medical coverage. When a player can file in California, he will, because that is where the best benefits are.”

In recent years NFL players have filed more than 1,500 cumulative trauma claims in California. Murphy says it has cost teams and insurers more than $375 million to settle those claims, and research by Marsh indicates that future cumulative trauma injuries could surpass the billion-dollar mark.

Since the NFL, which has revenue in excess of $8 billion a year, does not pay for a player’s medical expenses after his contract is terminated, the player’s union has a panel of workers comp attorneys for the players to consult to determine where it is best to file their claim, what sort of claim they can file, and what benefits they may be eligible for.

“The player has a concern about this because his team doesn’t pay for his medical expenses after they get rid of him,” Berthelsen says. “They should. Nobody’s asking the taxpayers of any state to pay for this. It is paid for strictly by revenues from the game, and the game should take care of those who were injured.”