The Legal & Business Aspects of Career-Ending Disability Insurance Policies in Professional and College Sports
By Glenn M. Wong & Chris Deubert
I. Introduction
The NFL, MLB, NBA and the NHL, collectively known as the “Big 4”, generate over $19 billion in revenue annually. Undoubtedly, the most important components of the product that is professional sports are the professional athletes themselves. Consequently, the collective bargaining agreements (CBAs) of the Big 4 ensure, in both direct and indirect ways, that the players receive over 50% of gross revenues, at average salaries ranging from $1.4 million (NFL) to $5.34 million (NBA). 1
The Big 4 dish out close to $10 billion in player compensation annually. Consequently, it makes sense that teams would want to insure itself against a player’s possible injury. This abbreviated Article explains some of the unique features and applications of disability insurance policies in sports. For a full version of the article, including a description of how disability insurance policies in sports affect key stakeholders such as brokers, insurance companies, agents, financial advisors, the NCAA, leagues, teams, athletes and unions, visit http://papers.ssrn.com/ abstract_id=1622043.
II. POLICY CONSIDERATIONS
The Definition of Career-Ending
One of the most contentious issues in an athlete disability insurance contract is whether the athlete has suffered the type of injury contemplated by the contract and worthy of a payout. Most athlete disability insurance contracts contain language requiring the athlete to suffer a “permanent total disability” or some variation thereof. Permanent total disability typically requires that the athlete be completely unable to perform their profession or sport for an entire 12-month period after the initial injury. Typically, players can only buy permanent total disability policies while teams are able to buy temporary disability policies to protect their guaranteed contract obligations. In order to qualify for the permanent total disability benefit, policies will usually require that there be a medical determination that the disability will prevent the athlete from ever again participating in his or her sport.
In addition, some contracts require that the athlete make best efforts to rehabilitate the injury. In the absence of such a requirement, the insurer will use provisions to encourage a player to return. For example, many contracts allow the player to resume playing for a specified period of time without jeopardizing resumption of future insurance benefits if the comeback effort is unsuccessful. In a permanent total disability policy such a provision is known as the “rehabilitation benefit” and in a temporary disability policy it is called the “recurrent disability provision.”
Exclusions
It is not uncommon for teams to require a player to execute an injury waiver, which describes a specific preexisting medical condition of the player. 2 Should the player suffer the same or a substantially related injury the team is not required to fulfill its obligations under the contract, i.e. the team can cut the athlete without compensation. 3
Insurance companies execute very similar exclusion clauses in their athlete disability insurance contracts. As part of the application process an athlete must submit a detailed medical history and may even have to undergo a physical examination by the insurance company’s own doctor. Failure to complete these forms accurately and honestly may nullify the insurance agreement. 4
Type of Coverage and Term of Coverage
All contracts in the Big 4 require that the athlete withhold from participating in other activities that involve a significant risk of injury, including sports in which the athlete is not a professional. 5 If an athlete is injured participating in a different sport without the permission of his team, he risks having his contract voided. 6
Contracts in MLB and the NBA are guaranteed for injuries that occur off-the-field and off-the-court, so long as the player has not violated the hazardous activities clause of his standard player contract. In the NHL, contracts are only guaranteed for injuries that occur during hockey-related activities. As a result, many NHL players buy insurance for off-ice injuries that covers them to the extent that MLB and NBA players are covered. Regardless, an athlete’s disability insurance contract does not normally provide coverage if he violates the hazardous activities clause of his standard player contract. Some athletes do buy insurance that protects them and their contracts if they are injured during a barred hazardous activity.
The events of September 11th had a dramatic impact on the entire insurance industry. In 2002, the premium on a MLB outfielder was about $7.27 per $1,000 insured and $24.25 per $1,000 insured for a pitcher, about 20% more than in previous years. 7 At the same time, an NHL player paid about $6.50 for every $1,000 insured. 8
As competitive pressures have pushed salaries higher and made contracts longer, insurance companies have been less willing to assume the risks. Coverage amounts dipped as low as 50-70% of a contract in 2004 as opposed to 80% earlier years. 9 In addition, insurance companies are less willing to insure long-term contracts, often drawing the line at three years. 10
Many athlete disability insurance contracts reserve the insurer’s right to discontinue coverage in the event that the athlete is traded. This provision gives the insurer the opportunity to reevaluate the risk, in light of possible changes in risk due to such things as changing role, different playing surface, different risk management or training strategies.
III. Creative Options
Temporary Disability Policies
A disability is temporary if it “exists until an injured worker is as far restored as the nature of the injury will permit.” 11 A temporary disability policy allows the insured to recover during the time in which the insured or the subject of the insurance is unable to work. In the sports context, this is a policy, which is typically only used by a team and not the player. The goal or purpose of a team purchasing a temporary disability policy is to provide protection in a situation where a player suffers a serious, but less than career-ending injury.
Considering that most contracts are guaranteed in professional sports, teams are still obligated to pay injured players. Consequently teams may take out insurance on some of their higher priced players, such that if that player is unable to play, at least the team does not have to pay all of his salary. For example, if new Phillies pitcher and recipient of a five-year, $120 million contract Cliff Lee injured his arm and required “Tommy John” surgery, he may not be able to pitch for a year or two. While the Phillies would not be able to collect on a permanent disability insurance policy, they could collect under a temporary disability policy.
MLB does not have a league-wide disability insurance program. Consequently, teams contract individually on certain player contracts, typically up to a maximum of three years at a time. Temporary disability insurance contracts in MLB typically have either a 60-day, 90-day or full-season waiting policy. The player must be unable to perform for the full waiting period before the team may recover. The range in premium amounts accounts for the player’s position and age: the cost for a 25 year-old shortstop would be less than that of a 32 year-old pitcher. The 90-day policy is the most common policy. It is believed that the NBA’s required waiting period is 41-games or half a season and that the NHL requires a 30-game waiting period.
“Key-Man” Insurance Policies
“Key-man” insurance is a relatively new insurance arrangement that provides benefits to probable playoff teams that do not make the playoffs as a result of an injury to a star player, or “key-man.” Based on team expectations, in the preseason, an insurance company will offer to reimburse the amount of a typical postseason game’s revenues if an agreed upon star player misses a certain number of games during that season.
For example, in 2008, the New England Patriots were considered a prime candidate to make the postseason. An injury to star quarterback, Tom Brady, in the first game of the season left Brady unavailable for the remainder of the season. Perhaps in part because of Brady’s absence, the Patriots failed to make the playoffs. If the Patriots had “key-man” insurance, they could have recovered an amount equal to the projected revenues from that missed playoff game. Some teams may also base their policies on the health of several key players.
Loss of Value Insurance
One increasingly popular option for athletes approaching free agency, particularly NFL players, is “loss-of-value” insurance. In general, “loss of value” policies allow a player to recoup money the player would have made as a free agent absent an injury. In general, insurance companies are reluctant to provide coverage on these types of policies. A “loss of value” policy may work in different ways, in the first example, the policy requires a player to miss a certain amount of games but includes a threshold amount of value lost (usually 50%) based on the player’s most recent contract offer. For example, a player that is a season away from free agency and is offered a $50 million contract by his existing team and misses at least four games in the final season of his existing contract can recover the policy amount only if his most recent contract offer is less than $25 million (50% of $50 million). If he receives an offer over $25 million, he cannot recover.
In the second type of such policy, a maximum benefit amount is agreed to and if the player receives an offer for less than that amount and the reason for the reduction is because of sickness or injury the insurance company agrees to pay the difference between the highest offer and the maximum benefit amount. For example, if the maximum benefit is $10 million and the player suffers an injury that causes him to receive an offer of only $8 million the insurance company will pay the difference of $2 million. If, however, during the life of that $8 million contract the player eventually receives more than the $8 million he must return the benefits up to the $2 million he recovered.
While the threshold amount has deterred some players from using the expensive policies (premiums can cost well over $100,000), loss-of-value insurance can prove a useful tool to a player and agent who feel that a player is not being offered his fair market value. One player known to have purchased such a policy is Dallas Cowboys quarterback Tony Romo, who purchased a $30 million policy prior to the 2007 season, during which he eventually signed a six-year, $67.5 million contract extension.
“Loss of Draft” Position
A loss of draft position policy covers professional prospects who are not drafted as highly as expected and the loss of income associated with that drop in draft status. The policy does not require that the player miss a particular number of games, but instead requires that for coverage to apply, the injury must be serious and lasting. In order to be serious the injury must negatively affect the player’s skills in a manner that causes substantial and material deterioration in his or her ability to perform; the illness must negatively affect his or her skills permanently.
The player’s anticipated compensation is determined from by his expected draft position, with a maximum limit of liability (generally half of the anticipated compensation). For example, if the player was anticipated to be drafted at position garnering a $12 million contract, the maximum limit of liability for the insurance coverage would be $6 million. If the player ultimately only receives a $3 million contract because of a covered injury or illness, insurance would only provide $6 million of the $9 million difference between his expected and actual contracts.
The insurance contract requires that if benefits are paid and the player ends up earning an amount which combined with the benefits paid exceeds the anticipated compensation within a specified number of years (usually six), the player must return the excess amount of benefits he received. Consequently, using the above example, if the player eventually earns $8 million in compensation during the first six years of his career, combined with the $6 million insurance benefit, he has now received $14 million. As a result, he would be required to return $2 million of the insurance benefit.
NCAA ESDI Program
The NCAA started the Exceptional Student-Athlete Disability Insurance (ESDI) program in 1990 to help protect student-athlete’s interests against both injury and agents who might attempt to encourage the student-athlete to leave school early for professional leagues. The ESDI program began with football and men’s basketball student-athletes but has since expanded to include baseball, ice hockey, and women’s basketball. Student-athletes who have demonstrated that they have the potential to be selected in the first three rounds of NFL or NHL draft, or the first round of the NBA, MLB or WNBA draft are eligible for the program. The policy provides the student-athlete with a lump sum payment 12 months after it has been determined that he/she has suffered permanent total disability. Student-athletes are eligible for loans to pay the premiums without jeopardizing their amateur status.
The main advantage of the NCAA’s program is that it is a group program, subsidized by the NCAA’s roughly 1,280 member institutions. As a result, the risk is spread greater, and no single institution is faced with the proposition of a multi-million dollar insurance payout. Costs of the program are shared equally and therefore are much less expensive than typical private insurance policies.
The NCAA’s ESDI program, administered through HCC Life Insurance Company, caps coverage at $5 million for projected first-round NFL draft picks and for men’s basketball student-athletes. Coverage for baseball, men’s ice hockey and women’s basketball is capped at $1.5 million, $1.2 million and $250,000 respectively. 12 The premiums cost between $10,000 and $12,000 for each $1 million of coverage, which is a few thousand dollars cheaper than a private policy. 13 It is reported that some 80 to 100 athletes participate in the ESDI program each year, and that approximately 75 to 80% of those are college football players. 14
Approximately seventy-five percent of first round picks in the NFL and NBA are enrolled in the ESDI program. Participation among MLB and NHL first round picks may be approximately 10% while each year only 1 or 2 WNBA first round picks are enrolled in the ESDI program. The fact that WNBA salaries only range from $35,190 to $99,500 may make the ESDI cost prohibitive or unnecessary for women’s basketball players.
League Programs
There are two different types of league programs: one for the benefit of players and another for the benefit of teams. The NFL, NBA and the NHL all operate league-administered disability plans for the benefit of players in cases of permanent total disability. 15 These plans are part of the collective bargaining agreements and require teams to contribute money each year towards post-career health or disability plans. Some of the plans are optional but in others the players accrue accounts to be used in the case of health problems under the plans based on their years of experience in the league.
IV. Conclusion
It is important to bear in mind that this area of insurance is relatively new, and has changed and evolved considerably throughout its short history. League programs and the NCAA and ESDI programs have only come into existence in the last 25 years. More important than how this specialty area of insurance has evolved but how it will continue to evolve. As sports disability insurance policies become more ubiquitous, the data and pricing models will become more accurate, predictable and stable. Nevertheless, it is important for people in the industry to keep up with developments as changes will be made to address market conditions, to address the needs of athletes, teams and leagues, to address changes in medical issues and rehabilitation and return from injuries and litigation decisions.
1. See Glenn M. Wong, ESSENTIALS OF SPORTS LAW §1.2.1 (Greenwood Publ’g, 4th ed. 2010) (discussing range of average salaries across various sports).
2. See NBA CBA, Exhibit A, NBA Uniform Player Contract, Exhibit 3, Prior Injury Exclusion, http://www.nbpa.org/sites/default/files/EXHIBIT%20A.pdf (last visited Feb. 26, 2010) (presenting NBA form for waiver of compensation in event of injury related to prior injury.).
3. See id. (“The Player’s right to receive his Compensation as set forth in paragraphs 7(c), 16(a)(iii), 16(b) of this Contract, or otherwise is limited or eliminated with respect to the following reinjury of the injury or aggravation of the condition set forth below . . . .”).
4. See Boston Mut. Ins. Co. v. N.Y. Islanders Hockey Club, L.P., 165 F.3d 93 (1st Cir. 1999) (noting that fraudulent statements on professional hockey player insurance application renders contract void).
5. See NFL CBA, Appendix C NFL Player Contract, Paragraph 3 (requiring that NFL players not engage in activities involving significant risk of personal injury); NBA CBA supra note 103 (prohibiting NBA players from engaging in activities that present risk of personal injury).; MLB CBA, Schedule A Uniform Player’s Contract, Other Sports, available at http://mlbplayers.mlb.com/pa/pdf/cba_english.pdf (last visited Feb. 26, 2010) (ordering that MLB players refrain from non-baseball activities presenting significant risk of personal injury); NHL CBA, Exhibit 1, Standard Player’s Contract, Paragraph 7, available at www.nhl.com/cba/2005-CBA.pdf (last visited Feb. 26,2010) (mandating that NHL players refrain from non-hockey related activities presenting risk of personal injury). ).
6. See Aaron Portzline, Off-Field Fun for Athletes Can Be Risky Business, Columbus Dis, May 4, 2005, at S01E. The New York Yankees voided third-baseman Aaron Boone’s contract before the 2005 season after Boone suffered a severe knee injury playing pick-up basketball. Boone had months earlier hit a dramatic game-winning home run in Game 7 of the ALCS to carry the Yankees over the Boston Red Sox. Boone’s departure cleared the way for the Yankees to acquire Alex Rodriguez. Id.
7. See id. (noting examples of premium rates for MLB players).
8. See Steve Caulk, Olympians Find Insurance Costly, Athletes Safeguard Financial Future Against Career-Ending Injuries, DENVER ROCKY MOUNTAIN NEWS 8S (Feb. 2, 2002) (listing cost for average twenty-two-year-old hockey player in NHL).
9. See Gordon Edes, Club Policy Has Shifted On Insurance Policy Shift On Insurance C, Boston Globe E1 (May 5, 2004) (relaying drop in available insurance coverage for pitchers).
10. See id. (mentioning limits to insurance coverage that companies are willing to afford).
11. BLACK’S LAW DICTIONARY (8th ed. 2004).
12. See Mike Knobler, Tech Blog: Georgia Tech at Clemson: 7:45 P.M. Saturday * ESPN, 790 AM; Premium receiver finds coverage, Atlanta J. & Const., October 19, 2006, at C1 (explaining maximum coverage for ESDI).
13. See Gary Klein, Premium Players: Insurance Policies Are Becoming Standard for Elite College Athletes,.L.A. TIMES, Feb. 20, 2005, at D1 (reporting rates for insurance against career-ending injuries).
14. See id. (noting typical ESDI participation).
15. See NFL CBA, supra note 5, at ARTICLE LI; NBA CBA, supra note 5, at ARTICLE IV: Benefits, Section 5; NHL CBA, supra note 5, at ARTICLE 23.
