Insuring Prince Fielder
On Tuesday, we learned that Prince Fielder’s career has come to an end following his second major neck surgery in just the last three years. Jeff Sullivan provided a fitting eulogy for Fielder’s career a couple days ago. While the news is certainly devastating for Fielder on a personal level, this post concerns another matter — namely, the potential financial implications of Fielder’s injury, both for the Texas Rangers and Fielder himself. At the heart of the matter: the nine-year, $214 million contract Fielder signed in 2012, a deal that guarantees him another $24 million annually from 2017 through 2020.
For starters, it’s important to note that Fielder is not officially retiring from baseball, but rather has been declared medically disabled and therefore is no longer considered to be physically able to play the game. This is an important distinction legally, because had Fielder voluntarily decided to retire, then he would have forfeited the roughly $104 million remaining on his contract. Instead, by being declared medically unable to play, Fielder remains entitled to the full amount he’s owed under his contract.
Because Texas reportedly has an insurance policy covering his contract in the event of injury, the Rangers will not be on the hook for the entirety of the team’s remaining financial obligation to Fielder. Instead, the club will apparently only be responsible for paying Fielder $9 million per year from 2017 to 2020, with the rest of his salary covered by the team’s insurer (who will reportedly contribute another $9 million per year) and the Detroit Tigers (who are on the hook for the final $6 million per season, based on the terms of the trade that brought Fielder to Texas in exchange for Ian Kinsler in 2013).
That having been said, although the precise terms of the Rangers’ insurance policy are not publicly available, it appears likely that this $9 million in cost savings will not come without some strings attached for the club. Moreover, it’s also possible that the team’s insurance company could still yet find a way to avoid paying some or all of its share of Fielder’s contract.
To begin, not all player contracts are insured, and not all insurance policies are the same. Unlike the National Basketball Association and National Hockey League, which have established their own league-wide insurance policies for player contracts, MLB teams decide for themselves (i) whether to insure a particular player’s contract, (ii) with whom to insure it, and (iii) what level of coverage they wish to receive.
The Boston Red Sox, for example, typically do not purchase insurance covering their players’ contracts in case of injury, a policy that came back to bite the team earlier this year when it was announced that Pablo Sandoval would miss the entire season with a torn labrum, leaving the club on the hook for all of Sandoval’s $17 million salary in 2016.
Even for those teams that do opt to take out insurance on some of their players’ contracts, however, the terms of these policies can differ considerably. Some insurance policies, for instance, cover up to 80% of a player’s salary in case of injury. Others, like the policy apparently covering Fielder, only provide the team with 50% of the player’s salary. Similarly, some insurance policies only kick in when a player misses an entire season, while others go into effect once an injury sidelines a player for 90 or more days.
One term that is apparently pretty standard in these agreements, however, is a requirement that the team must place the injured player on the disabled list — rather than simply release him outright — in order to collect the insurance proceeds. It’s not entirely clear why insurance companies typically insist on such a provision, although it’s possible they view it as protection against teams fabricating injuries for aging players with whom they have simply decided to cut their ties for performance-related reasons.
This means that, in order for Texas to collect its $9 million in annual insurance proceeds, the Rangers will likely be required to keep Fielder on the 60-day disabled list for each of the next four years. While this will have little competitive impact on the club during the playing season, it’s not without its cost to the team, as it means that Fielder will have to remain on Texas’s 40-man roster throughout each of the next four offseasons.
Specifically, under Major League Rule 2, teams must place anyone who is signed to a major-league contract for the following season on their 40-man roster by November 20th of each year. This includes players on the 60-day disabled list, who must be added back to the 40-man roster within five days of the final game of the World Series. Injured players cannot be re-assigned to the 60-day disabled list — and thus once again be effectively removed from the 40-man roster — until 45 days before the start of the next year’s regular season.
As a result, this means that, in order to receive its insurance money, Texas will likely have to keep Fielder on its 40-man roster from November through February for each of the next four offseasons. Thus, the team will, in effect, only be able to maintain a 39-man roster each of these offseasons, potentially limiting the team’s ability to protect an additional up-and-coming prospect each year.
While that development is unfortunate for the Rangers, in another respect the team may have been quite lucky that Fielder’s career-ending injury occurred when it did. In recent years, insurance companies have reportedly become reluctant to insure player contracts for more than three years at a time. This means that teams usually must renegotiate a new policy every two to three years for each player contract they wish to protect with an insurance policy.
At the same time, insurers are understandably often quite hesitant to provide coverage for pre-existing injuries. Instead, insurance policies will frequently exclude from coverage future ailments to any area of the body in which a player has previously sustained a serious injury.
Because the Rangers acquired Fielder from Detroit in November 2013, it would appear likely that the team’s insurance coverage was due to be renegotiated this upcoming offseason. And because Fielder had undergone season-ending neck surgery in 2014, insurance companies may have resisted an agreement to cover any future neck-related injuries Fielder may have sustained.
This means that, had Fielder reinjured his neck next year, rather than this year, the Rangers may very well have found themselves without any insurance coverage for the remainder of his contract. In that case, the team would have been on the hook for the full $18 million it owed Fielder annually through the 2020 season. So from Texas’s perspective, if Fielder were going to suffer a career-ending neck injury, it may have been quite fortuitous that it occurred now, rather than a future season.
Finally, it’s important to note that, just because the Rangers have announced that Fielder is medically unable to play, the team’s insurance provider may not necessarily agree. Indeed, it’s entirely plausible that the Rangers’ insurer will contest the team’s claim, thereby allowing it to delay — and potentially entirely avoid — paying the team under the policy.
Specifically, it’s not clear yet which doctors have declared Fielder physically unable to play. Assuming that the Rangers’ insurance policy grants the insurer the right to have such a determination made by an outside physician, and assuming that such an outside examination has not yet occurred, then it’s possible that the insurer’s preferred doctor may yet reach a different conclusion regarding Fielder’s physical state. In that case, the insurance company could argue that Fielder has not, in fact, been permanently rendered physically unable to play, and thus that the Rangers are not entitled to compensation under the insurance policy.
Alternatively, even if the parties all agree that Fielder is currently sufficiently disabled to trigger the insurance coverage, it’s possible that the policy requires that Fielder be reexamined every year in order to determine whether he still remains physically unable to play. In that case, it theoretically might be possible that, at some point down the road, Fielder will have sufficiently recovered to the point that he could be medically cleared to play, in which case the insurer would no longer be obligated to pay the Rangers. Should that happen, Texas would then once again be responsible for its full share of Fielder’s remaining contract, even if his skills had eroded to the point that he was no longer a viable major-league player.
So even though initial reports suggest that Texas’s insurance policy covers the last four years of Fielder’s contract, it may be too early to tell for sure whether the team’s insurer will agree.
Nathaniel Grow is an Associate Professor of Business Law and Ethics and the Yormark Family Director of the Sports Industry Workshop at Indiana University's Kelley School of Business. He is the author of Baseball on Trial: The Origin of Baseball's Antitrust Exemption, as well as a number of sports-related law review articles. You can follow him on Twitter @NathanielGrow. The views expressed are solely those of the author and do not express the views or opinions of Indiana University.
I feel bad for any permanently injured player, but the bottom line is he gets a giant pile of gold and never will have to worry about actually working the rest of his life. Most “normal” people don’t have that rosy of a future after suffering this type of debilitating injury.
Most people don’t suffer this type of debilitating injury.
Most people suffer, though.
Sure but plenty of people suffer debilitating injuries and only get long-term disability and social security, if they are lucky. I think I’d rather collect 24 million a year instead if I couldn’t work due to injury.
Most people couldn’t do what Prince Fielder did in the batter’s box for over a decade in an industry with $9-$10 billion in revenue.
And the revenue of the industry in which he worked is relevant why?
It reflects the value that society as a whole has placed on the utility of the industry.
In order to maintain those revenues teams must employee people with an extremely rare skillset. This gives the employees a strong negotiating position which means their salaries are directly related to the revenue of their industry.
Not being able to do what you love anymore hurts regardless of how much you’re getting paid. But Fielder (and his family) will certainly not have to worry about money for the rest of their lives.
It’s amazing how many people take this type of statement and go “OMG, OP just kicked Player X’s dog, let’s get him”.
I really wasn’t trying to be snarky, it’s just that everyone is feeling sorry for Fielder (rightfully, because that’s a terrible injury) but this is far from ruining his life. He is super rich, that makes it possible to get the best possible medical care and not worry about medical bills putting you in the poor house. Fangraphs throws around the value of WAR as about $7 million each. It would take a person making $200k a year (a damn good salary for 98% of the population) almost 35 years to make that kind of money. I feel bad for the Fielder being injured, I don’t wish that on anyone, but he is still better off than most of us.
Yeah, I dont think its too controversial to say that most people would probably take a neck injury and $100 million over their current life and healthy neck.
I just wanted to comment on this portion:
“Others, like the policy apparently covering Fielder, only provide the team with 50% of the player’s salary”
It is likely the insurance policy only pays the portion of Fielder’s contract that the Rangers owe, and rather not the entire annual salary. The total liability to the Rangers (and by extension, their insurer) is only after the money paid by the Tigers. After all, the Rangers insurance policy is likely not designed to protect the Tigers. However, I don’t know if the money the Tigers sent to the Rangers in the deal was a lump sum or annual amount, which probably would change things.
If I had to guess, it is structured somewhat like this:
Fielder Salary 2017: $24 Million
– Tigers Contribution: $6 million
——————————————
Rangers Total Liability: $18 Million
– Insurance Coverage (reportedly 50%): $9 Million
——————————————-
Rangers Net Liability: $9 Million
Which is what he says in the article, so I don’t know why you’re bothering to type this out.
“Instead, the club will apparently only be responsible for paying Fielder $9 million per year from 2017 to 2020, with the rest of his salary covered by the team’s insurer (who will reportedly contribute another $9 million per year) and the Detroit Tigers (who are on the hook for the final $6 million per season, based on the terms of the trade that brought Fielder to Texas in exchange for Ian Kinsler in 2013).”
Because this statement is not correct:
“Others, like the policy apparently covering Fielder, only provide the team with 50% of the player’s salary”
The insurer isn’t obligated to pay for 50% of the players salary, only 50% of the team’s liabiltiy for that salary.
Most of the cases, this is 50% of the players salary because the team is responsible for 100%. In this case, it works out to be 37.5% of the players salary.
I’m not sure how anyone could both read and comprehend the article and simultaneously not get from it what you bothered to type out.
I wonder if Fielder will have to try to get back on the field? Even if he is examined each year, you’d think he’d have to really put a lot of effort into reversing a “career ending” injury and it might not be worth it. If there are conditions to the payments, I could definitely see a settlement where Fielder gets part of the insurance money, but substantially less than $36 million in order to secure a final amount and not have to deal with those conditions.
If the Rangers negotiated a settlement that got fielder off the 40 man it would be an interesting data point in valuing the roster spot in other situations, though probably could be figured out with other players released that have some marginal value. Anyone want to write that article?
How much were the premiums?
That’s what I would like to know too. And how much would the premiums be if they insured Fielder for more than they did. Maybe they hit a “sweet spot” in the premium rate, which was why they insured him for the amount they did. I wonder how well insurance companies do by insuring players. We know they do pretty well for standard policies like home, auto, etc. where there’s tons of actuarial data and millions of customers to average things out so their net profit will be pretty much known in advance. But insuring players seems a bit more dicey.
I can understand why the Red Sox would prefer to be “self-insured”, rather than pay an insurance premium. If you can afford to be, that is obviously the most cost effective way to go, since you cut out the insurance company profit from the equation. I wonder if the Yankees are self-insured as well.
Yeah, insurance is to cover losses you can’t shrug off as “That’s mildly unfortunate, but it won’t actually change my life”. I doubt a few million makes a big difference to John Henry or the Steinbrenners.
If you don’t need to worry about how you’d pay for X if it happened, then you probably shouldn’t insure against X.
The only real exceptions are cases like some warranties and medical care where for various reasons the cost to the insurance company is much lower than the cost of actually paying for the work (in the case of warranties, because the manufacturer has access to the parts at wholesale prices and an incentive to keep you happy with the product even if that means taking less profit on the repair work; in the case of medical services because the supposedly “reasonable and customary” amount they put on the bill for the uninsured is outright fraudulent and for some reason medical providers are allowed to get away with this).
Medical charges are not “fraudulent,” they are just artificial and basically meaningless. The third party payer determines what will be paid but if the charge is less, they are happy to pay less. So the charge has to be set high enough that it is guaranteed to be over whatever the payer agrees to pay. And it has to be set high enough to be over the payment of the best paying payer, not the worst or the average. Collection ratio in my practice is about 45% and almost all of the write off is contractual. Only about 3% is bad debt.
That leaves the uninsured with the highest bills, paradoxically, but that will almost always get adjusted downward if you ask and show that you don’t have means – usually as simple as supplying tax returns.
You admit that your bills are padded to 55% more than you collect on average, and that almost none of the shortfall is bad debt.
When you send an individual customer a bill for more than a service was worth, after refusing to give a price in advance and claiming you were going to bill a reasonable and customary amount, in any industry but medicine, you’d be guilty of civil or even criminal fraud.
An auto repair or appliance repair business; which also doesn’t give a price in advance; that billed that way would be put out of business via the courts.
If your bills are reasonable and customary, then why enter a contract with various insurance companies that lets them pay you less? The insurance company already has contracted with me to pay you the full amount of any legal bill above the deductible. If the bill is honest, demand the full amount. You can sue me, or you can sue the company, as both of us are fully liable for any reasonable and customary bill. But you won’t because the bill you send is fraudulently high.
I am not impressed that you’ll let someone off if they prove poverty, the occasional act of charity (only if they prove worthy in your eyes) that does not justify sending an initial bill for more than can reasonably be expected.
Edited to add: I have nothing against MikeS who is probably a fine person doing everything he can to help others. A large number of my relatives are MDs, and they (or their employers) bill the same way everyone else does. It’s industry wide and 55% non-payment actually says MikeS is probably much closer to the reasonable and customary amount than most medical companies.
We will freely give the price of services prior to rendering them. Just ask. In fact, if people are uninsured or underinsured, we go over these things with them prior to rendering services, especially expensive ones.
If we do not enter into contracts with insurance companies, we can not see those patients, or the burden of getting reimbursed gets shifted to the patient instead of us and the patient has a higher share of cost because we are out of network. Most people will choose to see another physician rather than submit to those terms. Basically, we have to contract with these payers or we can not survive.
I’m not sure if you are aware how most insurance companies negotiate these contracts. Usually it amounts to “here is what we are going to pay you. Take it or leave it.” This is especially true of Medicare which constitutes 50% of my work and 25% of my income.
Charges are not fraud, just artificial. Much like the “rack rate” for hotels, “full fare” on an airline, or “sticker price” on a new car. Almost nobody pays those rates even though they are officially what the things cost. According to healthcare.gov, you are not really using “reasonable and customary” properly as those terms apply more to payments, not charges:
“UCR (Usual, Customary, and Reasonable) The amount paid for a medical service in a geographic area based on what providers in the area usually charge for the same or similar medical service. The UCR amount sometimes is used to determine the allowed amount.”
Heck, the term itself was created by the insurance industry so they can control how much they pay.
Disclaimer – I used to work in the insurance industry and grew up with both parents working for insurance companies, but have no direct knowledge of sports insurance. My dad actually spent some time working for Lloyd’s doing maritime adjustments (estimating damages on huge shipping vessels).
Most of these types of high $$/low occurrence/total loss markets are insured with what I would call “raw numbers”. They differ from what most people are used to with insurance because they only come into effect with a “total loss” scenario, rather than partial stuff like a broken window in a car or roof damage to a house. Because of that, the numbers are actually much easier for the insurance company and the sports team.
The insurance company really only needs to be marginally ahead of the average over a period of years to make money, and then they get to let the lawyers loose to deny coverage and negotiate a settlement. The rolling average for multi-year or “career ending” injuries would be the only real thing they need to beat. They would have a player coverage risk amount that they multiply by the rolling average of multi-year injuries and then tack on the profit margin they want. That would give them a per dollar covered per year rate.
The sports teams calculation is slightly more complex but still OK. They pay premiums above the contract that balances the approximate $7M (or whatever they use) per WAR with the ZERO WAR and $xM per year for multi-year injury. Assuming we use a hypothetical player that is worth 3 WAR per season and paid $18M per season, then the insurance premium team cost would be “break even” at $3M per year. If they feel the player is a real injury risk (e.g. 30+ years old), they may go beyond that.
I don’t know, but they probably saved around 30% or more if they went with GEICO.
THAT’S NOT HOW THIS WORKS! THAT’S NOT HOW ANY OF THIS WORKS!!
I’d love to know what the actuarial tables look like for writing these, whether they predict injuries better or worse than industry experts. And how much profit margin the insurance companies end up with.
I’m a bit surprised it makes sense for teams to pay that margin to reduce this particular risk, since they’re still on the hook for equally common risks like “player declines and stinks”. Which teams self-insure and which don’t — does it break down by wealth or liquidity, or are there other factors driving it?
I’d love to know myself, but I’d bet that in the current stage of this industry they’re probably using basic data from the leagues, plus publicly available information from sources like Fangraphs/THT, and padding the injury rates pretty heavily to cover (1) the necessary solvency reserves required by law and (2) the risk of having to pay a large claim such as Fielder’s. It’s only after a specialized coverage like this has developed a credible track record of experience that the insurers will really begin to rely upon their own independent research so they can sharpen their pencils to cut rates for competitive reasons (this assumes, of course, that the industry has been profitable enough to remain attractive).
I think the reason teams cover the injury risk is because they themselves feel they have much less certainty about predicting major injuries than performance decline. Guys like Fielder and Grady Sizemore were among the most durable players in baseball, and then they saw their careers over in a flash. So while a team might be comfortable with the dollar amount of a long-term contract because they have an expectation about the player’s performance, they may decide that they’re not as comfortable about the injury probability and that’s when they look for the insurance.
Seems like the team would eventually be able to reach a settlement between the three parties that allows Texas to remove him from their roster. There is no loss to the either Fielder or the insurer so I would think a small amount of money could get it done.
“There is no loss to the either Fielder or the insurer so I would think a small amount of money could get it done.”
Can you flesh out some specifics on how that would work– a settlement where the insurance company pays nothing extra and Fielder takes nothing less?
The insurance company doesn’t have to pay anything extra to allow Texas to remove Fielder from the roster. Now if they’re trying to get out of the 9M they’re paying, that’s another matter.
Well, Texas assigns some value to the 40man spot. Let’s say it’s $500k a year. They pay insurance company an extra 150k a year and Fielder an extra 150k a year and they clear 200k a year. Everyone is happy.
I believe players on the 60 Day DL do not count toward the 40 man roster.
There’s no 60-day DL during the offseason though, so he’d be taking up a 40 – man roster spot then.
During the season this is true, but come the offseason those injured players have to go back on the 40 as detailed in the article. That’s one less roster spot to devote to a prospect they might want to protect from the whims of the Rule 5 draft.
According to the article above, they do, at least during some portions of the offseason.
So you are saying pay the insurance company $150k to lift the requirement about Fielder being on the 40-man?
Granted it is conjecture, but from the article:
“It’s not entirely clear why insurance companies typically insist on such a provision, although it’s possible they view it as protection against teams fabricating injuries for aging players with whom they have simply decided to cut their ties for performance-related reasons.”
If it costs so little relative to the insurance payout to buy back the roster spot, then it would seem pretty trivial to even be concerned by it. It would just be that tiny bit of overhead compared to the $9M payout they are getting.
Why would they need to pay Fielder anything extra? The insurance company is the only obstacle to removing him from the 40 man roster; Fielder is going to get paid his contracted amount regardless.
If there’s a reason the language is in there in the first place, there’s a reason why the insurance company wouldn’t want to do it, and that reason likely transcends “a small amount of money”.
This has happened before (Albert Belle, Rusty Greer for examples) and the teams were not able to get out of it.
Well golly. It sure is good to know that baseball is still America’s pastime and that those who run the game are still mostly concerned about the game itself. Cuz it would sure be disappointing to take my kid to a game and talk about how it really is all about lawyers and doctors and insurance.
This is not like pictures on your iPhone. This article does not have to be deleted in order to make space for one you care about.
I’m not talking about the article. I’m talking about what BASEBALL has become.
So is baseball still about the game itself or has it changed? I’m confused. Or perhaps more accurately, you are confused.
jfree–
This…this may be the dumbest thing I’ve read in some time. And it seems earnest/serious too. Quality troll job, 8/10.
Yeah it is serious. Nomar Mazara needed Rule5 protection this last offseason – and the Rangers have long been viewed as one of if not THE best Latin programs (ie the exact players who usually need 40-man protection before they are ready for MLB) with a huge spending spree in 2013 (need protecting in the 2017/8(?) offseason). Add Delino DeShields as a successful Rule5 pick that the Rangers will also now be limited in for the next few years. And more likely than not a change at the front-end of the July IFA signings because the back-end is now clogged up. And every team out there now knows the pickle the Rangers have put themselves in now so say hello to more unfavorable trading of those prospects (which the Rangers have also depended on).
It’s easy to just say ‘9million dollars minus the premium’ and pretend that that’s it. And that is it for the owner. For the team, they may well have just strangled one of their long-term strengths.
But hey – it’s good to know that apparently no commenters here are able to have the slightest freaking clue what the impact of this could be – ON THE BASEBALL FIELD.
Just to put more names of ‘future Rangers prospects at Rule5 risk’
On the MLB.com site of top-30 Rangers prospects – #2, #5, #8, #12, #13, #16, #18, #20, #21, #23, #28, #29 are reasonably likely to need Rule 5 protection (or are already on it) in the next few years. Without the Latin signings, Rangers don’t have much of a farm system.
What does this have to do with the alleged bastardization of America’s pastime?
We have a clue. The roster spot issue is covered in the article. And the “Do statheads ever watch a game?” thing is kind of old.
There’s a point in there, but it may need about nine months.
Baseball has become “all about lawyers and doctors and insurance” because one baseball blog posted one article about insurance?
I’d be willing to wager (pun intended) that you have not been alive long enough to have existed on this planet when major league baseball wasn’t a business.
Thank you Nathaniel, very informative.
Does MLB reduce the luxury tax hit for salary paid by insurers? I’m guessing not, but depending on what happens to the luxury tax in the next CBA it could also be a limiting factor for Texas.
My question, too. And, like you, I would also guess that the total salary still applies, especially with the above roster spot explanation.
I thought players on the 60-day DL didn’t count against the 40-man.
Ah “offseasons”. Got it.
“Specifically, under Major League Rule 2, teams must place anyone who is signed to a major-league contract for the following season on their 40-man roster by November 20th of each year. This includes players on the 60-day disabled list, who must be added back to the 40-man roster within five days of the final game of the World Series. Injured players cannot be re-assigned to the 60-day disabled list — and thus once again be effectively removed from the 40-man roster — until 45 days before the start of the next year’s regular season.”
Source: http://www.fangraphs.com/blogs/insuring-prince-fielder/
Not quite accurate, as Detroit only paid $4m this year instead of $6m. They’ll pay back that extra $2m in ’19 and ’20. The range of outcomes seems to be Texas owing anywhere from $22m (if the whole salary was covered, not just the $18m – DET’s money has nothing to do with this) to $34m. So $5.5-8.5m per year. That’s a hell of a lot better (financially) than what the situation looked like midseason with a seemingly healthy, struggling Prince Fielder. Makes a Yu extension much more realistic.
Where are you getting this information on the Detroit payments?
Also, I think the conventional wisdom is that the insurance payments won’t kick in until next year.
Also, since the insurance contracts are not the same as the player contracts (there is zero reason for them to be transferable), it seems highly unlikely that a 50% insurance coverage would include the Tigers’ portion.
Rangers beat writer: “Tigers owe $26 million on Prince Fielder’s contract. Paid $4m of the $30m included in trade this year. $6m, $6m, $7m, $7m next four years.”
And yeah, the dollar amounts I mentioned in the comment above are for ’17-’20. Also, money sent from DET isn’t earmarked as “PRINCE FIELDER CONTRACT MONEY.” It’s simply cash sent to offset the financial burden they took on at the time, used in any way they feel fit. The actual contract is for a $24m salary, so it’s definitely possible that that’s what is insured. DET sending money has nothing to do with any of this. The Rangers could’ve decided to lower premiums by lowering the coverage, but we don’t know that.
I get what you’re saying about it not being “Prince money” after the fact of the trade. It’s just that it would be weird to call that “half” when for all intents and purposes it would really be 2/3 for the Rangers.
And either the beat writer is wrong or BP is wrong, not that it really makes much of a difference.
Great article and analysis, always wondered the specific details regarding these insurance policies on players. One of the most overlooked areas of importance in regard to putting together a financially viable roster. Thanks for investigating and sharing the knowledge!
-Tom
This situation brings up a really intriguing part of MLB contracts and the CBA. I’m really curious what the insurance premiums on a contract like this are and where the money for the premium comes from. Is it built into the contract itself (X amount of dollars of the annual salary go to paying the insurance premium) or is it just a built in operating expense in the organization’s budget?
Prince is certainly under no obligation to give up guaranteed money, but I wonder if he, the organization and the insurer can negotiate some sort of settlement to at least free up the off-season 40 man spot. Does the CBA even allow that? I think there are fairly strict rules on renegotiating a guaranteed contract but maybe this is a special situation.
Side note: How does one get into the MLB contract insurance business because I feel like business would be quite profitable. As injury prone as certain players are, the likelihood of a permanently debilitating injury is still quite rare. Even if the premium is say 5% of the annual salary to cover 50% of the salary, there’s an awful lot of money to be made there without a ton of risk.
Probably, if you have a few billion laying around and you can convince a MLB team that you would pay out.
I don’t know if they insure athletes, but Warren Buffett’s company Berkshire Hathaway does quite a bit of what they call “super-cat” insurance – policies for things (like hurricanes, asbestos liability, or reinsurance for other insurance companies) that can’t easily be figured from an actuarial table. He stresses every year when they make a lot of money because there haven’t been any catastrophic disasters that there will eventually be an event where they will have to pay and they might actually lose money for that particular year.
He also points out that one of the reasons that companies come to them and are willing to pay a higher premium than other companies might charge is because they know Berkshire has the resources to cover the policy should a disaster happen (besides several hundred billion in stocks and companies owned, Berkshire currently has over $70 billion in cash and short term notes) .
They might be your competition.
Interesting that you mention catastrophic insurance situations. I live in a mandatory flood insurance zone in Florida (Broward County) where flood insurance is required by law. The odds placed on “high risk” flood zones are usually a 1 in 4 chance of catastrophic flooding happening over the course of a 30 year mortgage. It isn’t cheap insurance and I’m sure the insurers make a killing, but like you (via Warren Buffett) said, when the big one happens it’ll cost them dearly.
In the case of a baseball player, I feel like the risk is a little bit more safe because how often is a player medically disabled from ever competing again? Especially with so many years/dollars remaining on the contract. Prince’s injury situation just seems like an incredibly rare one. The serious injuries in baseball are typically single season injuries, maybe slightly longer for TJS guys (and I’m sure pitchers cost more to insure). Rarely do we have a situation where a player is just permanently disabled from ever returning to competition, even double TJS guys.
Let’s say the Arizona Diamondbacks have an insurance policy on Zack Greinke’s $34M/year and he needed Tommy John tomorrow. He’d miss the remainder of 2016 and all of 2017. If a “typical” insurance policy is 5% to cover 50% (total guess). They’ll have paid $1.7M to cover $17M of Greinke’s 2017 salary. Obviously as an insurer you’re taking a huge loss there, but that’s a worst case scenario for the highest paid player in baseball. If you also insure 20 healthy players making $20M/year, you’ve covered your losses on Greinke and then some. Of course there is always the risk that the TJS fails or Greinke’s UCL pulls a Daniel Hudson and tears again during his rehab but that seems like such a minuscule chance. And unlike flood insurance where the flood likely impacts hundreds or thousands of policyholders at once, the odds of multiple clients having debilitating injuries in the same season has to be incredibly low.
Perhaps I’m overestimating the prevalence of injury insurance policies in MLB though. Maybe we’re just talking about a handful of especially high risk players (like Prince) who have their contracts insured by specialty companies like Berkshire. I also may be over/under estimating the cost of the premiums to insure contracts like this. 5% to cover 50% seems like it would make sense but it could be way off. I really would love to get more info on how MLB contracts are insured though. Who does it, what does it cost, how many players have it, how does it impact contract negotiation, etc. I wonder if the next CBA might consider handling injury insurance in the same way the NBA and NHL do with league-wide insurance.
Flood insurers don’t make a killing. Flood insurance is a federally-backed program that loses money – https://en.m.wikipedia.org/wiki/National_Flood_Insurance_Program
I appreciate Nathaniel’s responsiveness to our requests for this very post yesterday. I also appreciate the analysis – insurance of athletes, performers, etc. is something that most of us are aware of, but it’s rarely detailed in any depth.
“Alternatively, even if the parties all agree that Fielder is currently sufficiently disabled to trigger the insurance coverage, it’s possible that the policy requires that Fielder be reexamined every year in order to determine whether he still remains physically unable to play.”
Have to wonder if that’s one big reason that insurance requires the team to keep a player on the DL rather than release him outright. (The scenario stated in the post of fabricating an injury for a declining player is another reason.)
Everything I’ve ever read about these insurance policies is that they are policies between the team and an insurer. In other words, the player isn’t a party to them. So if a player is released, I don’t see how an insurer would have any information about his ongoing physical condition. Once a player is released by a team and clears waivers, his contract is terminated except for the team’s obligation to pay his remaining guaranteed salary, correct? The player contract is the reason that a team is entitled to get medical information from the player. Looking at the CBA, the club is allowed to disclose that medical information to its insurer. (It’s Article XIII (G) of the CBA.) One logically assumes that the Rangers’ insurance policy requires it to disclose this medical information to the insurer.
So I’m pretty sure that if the Rangers release Fielder then the team and its insurer won’t have any ongoing rights to access his future medical information. From an insurer’s perspective, requiring the team to keep Fielder under contract is the way to make sure that doesn’t happen.
If the insurance company tries to screw Texas out of money for what seems a fairly cut-and-dried case, then I’d expect MLB to have its own league-wide insurance, with strict rules in place, before the next time this happens.