Vice Sports - June 2016

Why is MLB still without league-wide contract insurance?

By: Ben Berkon

June 10, 2016

Pablo Sandoval was a folk hero during his tenure in San Francisco, affectionately nicknamed "Kung Fu Panda" by at least one former teammate.

Yet after slumping his first season with the Boston Red Sox last year and then losing his third base job to Travis Shaw in spring training, Sandoval quickly became the subject of ridicule, and fat shaming, in Boston. When he went on the disabled list in April with a shoulder injury, many openly wondered whether he was faking it.

The injury turned out to be very real—a torn left labrum requiring season-ending surgery—and so are the consequences for the Red Sox. Because Boston decided not to insure Sandoval's five-year, $95 million contract, the team is liable for all of it, including the $16.7 million owed to the 29-year-old for this season.

"We have insurance on some players, not all players," team chairman Tom Werner said on WEEI, defending the team's decision. "Collecting on an insurance is not the easiest thing and then you have a debate on how much insurance and when do you collect? We do it on a case-by-case basis, and we did not do it for Pablo."

"There's a great debate on this topic—on whether to insure or not insure," Red Sox's President of Baseball Operations Dave Dombrowski told the Boston Globe.

But if Major League Baseball had a league-wide insurance program like those in the National Basketball League and the National Hockey League, the Red Sox would not have had to make that decision in the first place. In the NHL's program, for example, a team will be reimbursed 80 percent of a player's salary after he misses 30 consecutive games for the same injury (as long as it was not pre-existing). Under such a program, the team would likely have been covered for the majority of Sandoval's contract, the fourth most expensive on Boston's payroll.

For now, however, MLB relies on teams taking out individual policies, and the Red Sox took a gamble on the Panda.

As baseball contracts have grown more valuable, so, too, has their coverage. Underwriters have learned a lot in the 15 or so years since the Baltimore Orioles infamously recouped $27.3 million of the $37 million owed to outfielder Albert Belle after degenerative hip osteoarthritis ended his career in 2000, with three years remaining on his contract.

"I think the Belle deal definitely increased awareness of insurance," said Dan Burns, the president of Pro Financial Services, which underwrote the Belle deal—and took a huge loss on it. Insurers are now more aware of the high risks involved, and they have tightened their parameters for such deals accordingly. Insurance is now often times incorporated into the contract negotiation process for players.

"We try to mirror the player's contract identically, so that if the team is obligated to play the player, then the insurance company is, too. We normally try to address it in the wording so that everyone understands completely how the insurance is intended to work," Burns said. "And because of that, we've had very few disputes."

Hence Werner's sentiments: collecting on insurance has become more difficult.

The conundrum with Sandoval notwithstanding, however, most MLB teams do insure their top-earning players. If anything, the practice has become more pervasive, not less, since the Belle deal. At their peak, Burns estimates, a team insures upwards of ten contracts that they deem large enough in dollars and long enough in duration. It isn't cheap.

"[Contractual insurance has] become so expensive that it's a cost item we really have to look at when you put your payroll together," Walt Jocketty told the New York Times in 2002, when he was GM for the St. Louis Cardinals. That year, according to the Times, MLB spent $55 million in premiums. Since then, player contracts have grown about 95 percent more expensive, and the cost of covering them has increased accordingly.

The NBA and the NHL both implemented their subsidized, league-wide insurance programs to give teams ready access at lower premiums almost two decades ago. Could MLB follow their example?

"To a great extent, we are guaranteeing the marketplace and guaranteeing consistency," Marc Blumencranz, the president of BWD Sports and Entertainment, which oversees the programs for the NHL and the NBA, told in 2012. "Rates within our programs can go up and down [in 2003, per an ESPN report, the NBA's insurance rate cost four percent of salaries], but they do so only within pre-negotiated narrow parameters. By taking advantage of the leagues' group purchasing power and locking in terms and conditions on a long-term basis, the leagues can control costs, guarantee availability of coverage and remove the vagaries of the marketplace."

"Anytime you purchase insurance as a group, you save money. You have the benefit of 30 teams pooling their money," Leigh Ann Rossi, BWD's executive vice-president, said. "MLB's office has considered it. Teams have as well."

Rossi did not comment on whether BWD was currently developing an insurance program with MLB or how such a program could be tailored to the league.

Burns, whose company specializes in individual player and team plans, does not believe a league-wide insurance program is feasible for MLB, which unlike the NBA or the NHL does not have a salary cap.

"There's not the same uniformity amongst MLB teams like there is in a league like the NHL," he said. "There's wide ranging disparity between the economics and payrolls of each individual MLB team. So a MLB team in a major media market—like in New York or Los Angeles—obviously has a much larger revenue stream and a much higher payroll than a team in a smaller market [like in Florida]."

The wide range of payrolls in MLB means there's a similarly wide range of risks assumed by teams right now, and premiums paid, which could certainly make implementing a league-wide program where all teams receive the same rate more difficult. The disparity, however, is also a reason a program might be desirable: if costs are kept down, smaller-market teams could take on more risk and compete for bigger contracts.

A league insurance program could be a boon for players, too. Consider the example of pitcher Brandon Webb. Pitchers are particularly risky, as far as insurers are concerned. "Pitchers receive a much higher frequency of disability or injury than position players," Burns said, and noted that premiums for pitchers who have experienced "severe arm trauma" (such as Tommy John surgery) cost teams about 20 percent more, on average, than those without a history of injury.

But Webb had been the poster boy for durability: going into the 2009 season, the 29-year-old Arizona Diamondbacks ace had tossed 1,315.2 major league innings and spent just 15 days on the disabled list in 2003, his rookie season, for right elbow tendinitis inflammation. He never underwent surgery for an elbow or shoulder ailment, which is the typical "red flag" for an insurer. The Diamondbacks were reportedly prepared to offer Webb a three-year, $54 million extension, but when the team failed to secure contract insurance in the open market, they had to pull their offer. He had even passed the physical.

Unfortunately, Webb tore his labrum weeks after the Diamondbacks rescinded their offer, and officially retired in 2013 after missing almost four full seasons.

See the rest of the article in its entirety on the VICE Sports website here.

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