Insurers Become Key Players In Baseball Deals

"Whether its a new contract, or an extension given to a player on your own roster, insurance speaks directly to the length of the contract," said John Schuerholtz, executive vice president and general manager of the Atlanta Braves. "It is difficult at best, and impossible at worst, to find affordable insurance to cover the large dollars that ballplayers receive today."

Mr. Schuerholtz told National Underwriter that insurance to reimburse a team if a key player is injured is part of the new math used in determining his annual budget for player payroll. Atlantas general manager said sharing the financial responsibility with a third party has become fundamental as salaries have escalated over the past decade.

"Only once in my 24 years with the Braves can I remember a player signing a significant contract without a policy in place," he recalled, adding that "we swallowed very hard when the insurance company refused to cover a pre-existing condition for one of the most popular players on the team."

Chris Antonetti, assistant general manger of the Cleveland Indians, described the ability to obtain insurance as a determining consideration factor in whether his team would make a contract offer to a free agent. "Insurance is as big a factor as a players history of injury," he said, "regardless of the length of the contract."

Pittsburgh Pirates General Manager Dave Littlefield said insurance is part of doing business in todays high-stakes game. As a small-market team with limited revenues, Mr. Littlefield relies on insurance to avoid financial pitfalls that could handicap his team. "There is no way we could afford to sign a player for longer than one year without knowing his salary would be replaced if we lost his services for any length of time," he said. "Many teams can look at the possibility of self-insurance, but that does not work in our equation."

Before the Pirates made catcher Jason Kendall the highest paid player in franchise history with a six-year, $60 million contract extension in 2002, insurance broker John Scotti was called into the closed-door negotiations to guarantee the transaction. The negotiations were overshadowed by the memory of the compound ankle fracture Mr. Kendall suffered early in his career. (In a move to free up payroll dollars, Pittsburgh traded its all-star catcher to Oakland in November in exchange for two moderately priced pitchers.)

"It's not like the old days. In the age of e-mail, cell phones, complex guarantee language, physicals and insurance, what used to be done with a handshake now needs lawyers and doctors to chime in," said New York Mets General Manager Omar Minaya. "Even when teams do make deals, they don't announce them until each clause in the letter of agreement has been approved and the last X-ray perused."

A large provider of both temporary and permanent disability insurance to Major League Baseball teams is American Specialty Underwriters in Woburn, Mass., a wholly-owned subsidiary of Houston-based HCC Insurance Holdings Inc.

"Every team handles its exposure differently," explained Bill Hubbard, president and CEO at ASU International. "Teams want short-term contracts due to an anticipated loss of skill. Players want longer terms for a sense of security and the promise of enhanced performance, but we have determined that just the opposite is usually true."

Mr. Hubbard said shorter contract terms are more attractive to carriers because it gives them additional opportunities to renegotiate terms and conditions. He added that pitchers are a higher risk than position players, and that the age of a player plays a major factor in underwriting.

"This is a very small, very volatile group of individuals and limits are very high. You have players running into walls and pitchers throwing the ball with unnatural motions," said Mr. Hubbard. "At some point, there is a quantum of risk. Some teams will accept that exposure. Others look to us to share that burden. Maybe well take a risk on a player, but with a caveat for an elbow that has been injured or undergone previous surgery."

Some teams rely on insurance more than others, including the New York Yankees. Team owner George Steinbrenner described the services provided by ASU as "a model for the insurance industry."

The Yankees recently filed a claim hoping to recover part of the $70 million still owed to first baseman Jason Giambi, who missed the majority of the 2004 season with a variety of ailments, culminating with the diagnosis and treatment of a tumor. Mr. Giambi signed a seven-year, $120 million contract with the Yankees after his MVP season with Oakland in 2000. New York GM Brian Cashman said any insurance money recovered from the claim would be used to sign a player to back-up or replace Mr. Giambi next season.

However, in reports published in the San Francisco Chronicle on Dec. 2, Mr. Giambi admitted to a federal grand jury that he took steroids and human growth hormones in 2003. Officials from the Yankees and ASU International declined to comment on whether the insurance policy on the first baseman included exclusions for the use of performance-enhancing drugs.

Very few teams have the capacity, or the appetite, to go without insurance. According to Mr. Schuerholtz, the Braves take out insurance on the higher-priced, irreplaceable players and take their chances on younger position players. A Los Angeles Dodgers representative said there are always plenty of outfielders in the minor leagues eager to step up if a major league player is sidelined by injury.

However, insurance has become an unacceptable option for the Seattle Mariners as the cost of premiums continues to increase. "Insurance is becoming less and less common," said Kevin Mather, the executive vice president and chief financial officer of the club. "We do not, and have not used insurance for several years. It just does not make sense for our financial situation. The high premiums have given most teams reason to think twice about the use of insurance."

The newest twist in insurance for high-profile athletes is "Loss of Value" (LOV) coverage that can be taken out by either a team or individual players. Underwriting is based on expected levels of income and production on the field of play.

Individual coverage written by Peterson International Underwriters in Valencia, Calif., can guarantee years of a contract beyond the teams obligation. "Disability insurance from ASU can cover this year if a player is disabled this year, but not next. Thats where we come in," said Tom Peterson, a representative of PIU.

Mr. Hubbard added that ASU would also write LOV to secure a players potential income if he is injured in a sport other than baseball. "At the age of 25 or 26, it is probably a wise financial decision for a player with the likelihood of earning $30- or $40 million in free agency to take out coverage now just in case he is injured skiing or in a game of pickup basketball in the backyard and misses his chance for the Golden Goose," he said.

The availability of disability insurance may be a major factor in the negotiations with two of the top-tier free agents at first base this seasonCarlos Delgado and Richie Sexson. Both come with question marks because of prior injuries.

Mr. Delgado, a 32-year-old who has spent his entire career with Toronto, and Mr. Sexson, a 29-year-old coming off an injury-marred one-year stint in Arizona, both are big men who have home run power.

Mr. Delgado is coming off his least productive season in years and played in just 128 games, primarily because of a strained rib cage. He made $68 million over the last four seasons and accounted for nearly 40 percent of the Blue Jays entire budget over the last two years.

Mr. Sexson played in just 23 games last season and earned $8.725 million. His season was ended in June by a partial tear in the labrum of his left shoulder that required surgical repair. He claims to be 100 percent, but it's an injury that can recur for hitters and may give suitors and insurers pause.

Dan Aznoff is the former editor of the National Underwriter Company publication,"Insurance West." He now works as a freelance writer out of Bellevue, Wash. He may be contacted at Dan@AJournalist.com.

Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.