Will Insurance on A-Rod’s Contract Save The Yankees?

This was written in December, but with recent stories surrounding Rodriguez, we’ve pushed it back to the front page for reference.

After his monster MVP season in 2007, Alex Rodriguez signed a new 10-year deal with the Yankees for $275 million, plus an additional $30 million in marketing incentives linked to home-run milestones. So far, the Yankees have paid Rodriguez $161 million, leaving $114 million on the contract. That breaks down to $28 million for 2013, $25 million for 2014, $21 million for 2015 and $20 million in 2016 and 2017.

This week, we learned A-Rod will undergo left-hip surgery surgery in January to repair a torn labrum, a bone impingement and a cyst. The surgery is being delayed to give Rodriguez time for physical therapy to strengthen the hip. Recovery time is estimated at four to six months, which means a return to the Yankees lineup in June — at the earliest.

But what if A-Rod’s recovery doesn’t go as planned? What if the surgery isn’t successful? What if A-Rod doesn’t recuperate as quickly as expected? What if A-Rod doesn’t play in 2013? What if his career is over?

There’s been plenty said about what this might mean for the Yankees on the field, but I want to address what this means for the franchise’s bank account. After all, the money — in particular, the goal of keeping the payroll under $189 million in 2014 to avoid the luxury tax — is driving the Yankees’ decision-making about who plays where on the field. Specifically, there’s a question about insurance.

It’s been reported the Yankees have insurance on A-Rod’s contract. But what does that mean? Well, without the actual contract, we can’t know for sure. Because insurance is a matter of contract, the devil is often in the details. We do know a fair bit, though, about how these insurance contracts generally work, so we’ll start there.

An insurance contract on a professional baseball player works like most insurance policies: The insured pays a monthly or yearly premium for a set amount of coverage to be paid by the insurer if one of the risks covered in the contract comes to pass. There may be exclusions for injuries sustained during particularly risky activity (such as skydiving) or for pre-existing conditions. The contract is for a set term of months or years, after which it must be renewed. And there’s a deductible — an amount the insured pays before the insurer’s obligations kick in.

The Washington Post‘s Adam Kilgore recently explained some of the details on how these insurance policies work:

For their largest contracts, major league teams purchase policies that will cover them if a star player misses extended time. “The definition of large varies from team to team,” said Dan Burns, the president of Pro Financial Services, a leading underwriter. “What’s not large for the Yankees may be large for the Nationals. And what’s large for the Nationals is very large for the Kansas City Royals.”

The policies differ based on team preferences. Some insurance kicks in if a player misses 60 regular season days, Burns said, while other policies activate only if the player misses an entire season. The percentage of the contract reimbursed also differs – some teams only insure to recoup half of the contract for time missed, while other policies cover 80 percent of the salary.

Before the Sept. 11, 2001 terrorist attacks, it was common for teams to purchase insurance for the entirety of a player’s contract. But the insurance industry paid out billions and billions in 9/11-related claims, which led to a tightened insurance market. Now, even if a player’s contract covers five, six or seven years — or, in A-Rod’s case, 10 years — teams typically cannot insure the player for more than three years at a time. When the policy expires, the team can renew, but any new injuries the player suffered in that three-year window would be taken into account in the new policy.

We don’t know the start date for the Yankees’ insurance contract on A-Rod, but for our discussion purposes, let’s assume it was purchased before the start of the 2012 season and covers a three-year term. Let’s also assume the Yankees chose to pay a higher premium in exchange for a small deductible — meaning the policy would kick in if A-Rod remained on the disabled list for 60 consecutive days, as opposed to 90 or 120 days. Let’s also assume the Yankees insured the contract to the fullest amount possible — say, 80% of A-Rod’s salary.

With such a policy in place — and assuming all other policy terms were complied with — the insurer would likely start paying out under the policy after the season’s first 75 days. The first 60 days A-Rod spent on the disabled list to start the season would count as the deductible. The next 15 days would count as the first pay period after the deductible was exhausted for which A-Rod’s services were unavailable to the Yankees due to injury (major-league ballplayers are paid on a semi-monthly basis). This process would continue unless — and until — A-Rod came off the DL. If he spent the entire 2013 season on the disabled list, the Yankees would potentially recoup in the range of $16 million. I reached that figure as follows: 80% of $28 million (A-Rod’s 2013 salary) equals $22.4 million. From that figure you subtract a little more than $6 million for the deductible; that’s approximately 80% of the amount A-Rod will be paid during the season’s first 60 days.

If Rodriguez’s injury forced him to retire, the Yankees could potentially recoup 80% of his 2014 salary — or another $20 million. But the Yankees would not have insurance coverage for the 2015 to 2017 portion of A-Rod’s contract and would have to assume that loss as a sunk cost. Again, this is all based on my assumptions about the length of the contract, the deductible and the percentage of A-Rod’s salary covered under the policy.

The one thing an A-Rod insurance policy doesn’t give the Yankees may be the one thing they really want: luxury-tax relief. That’s because all of A-Rod’s salary from 2013 to 2017 will count toward the luxury tax in each of those seasons, even if the Yankees are reimbursed for a significant portion of that salary under the policy. So even if the insurance payout gives the Yankees the financial flexibility to sign or trade for players to replace A-Rod, the luxury tax still looms if the Yankees’ payroll (including A-Rod’s salary and the replacement player(s) salary) exceeds $189 million in 2014.

Not all teams insure their most expensive players. And those that do insure against the risks of a season-ending or career-ending injury often hedge their bets with less coverage in exchange for a lower premium. Even if the Yankees bought the best policy available, there are risks. The insurer could challenge the timing of A-Rod’s injury or whether it’s related to surgery performed on A-Rod’s right hip in 2009. The Yankees and A-Rod could end up in a dispute over whether he should play after his rehabilitation is completed.

However this plays out, the Yankees will still be on the hook for A-Rod’s salary, and all of it will be counted against the luxury tax. Some teams just can never catch a break.

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Wendy writes about sports and the business of sports. She's been published most recently by Vice Sports, Deadspin and NewYorker.com. You can find her work at wendythurm.pressfolios.com and follow her on Twitter @hangingsliders.

49 Responses to “Will Insurance on A-Rod’s Contract Save The Yankees?”

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  1. Hurtlockertwo says:

    This is interesting. I would assume those premiums must be sky high for pitchers who seem to be a higher risk of long or permanent injury.

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  2. TKDC says:

    I would guess that most insurance policies are put into place so that teams can make adjustments while staying within a set budget. Take the Nationals for example. I’d guess that they have an insurance policy on Dan Haren so that if for some reason he can’t pitch (or can’t pitch much), they’ll still have a million or two in relief so they can go to the scrap heap. The type of insurance described in this article seems like it could eat up 8 figures a year on the highest payrolls, and would you rather spend that on premiums for your best players or adding another star or two?

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    • Chicago Mark says:

      I’d guess if Haren pitches “a little”, he wouldn’t be covered. I guess you could get insurance that covers you if he doesn’t pitch, say 150 innings. It’s like anything, the insurance companies would come up with a premium. But it sounds like they would simply have insurance on Haren if he misses >x amount of time. AND, the insurance may not cover if it’s a pre-exsisting condition. On the 8 figures note, I would guess not. The teams probably don’t worry about the lessor players. Unless they get a total team discount. But my guess again is not. Possible but not probable.

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      • TKDC says:

        The Yankees, Red Sox, etc. was what I was referring to, and having insurance that covered 80% of the salaries of players that miss 60 or more games for those teams, including only players that make, say, $10 million or more, would be 8 figures I’d guess. Almost certain but not certain.

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    • Baltimorechop says:

      You cannot buy insurance on one year contracts, or so I read a thousand times last spring when Madson came down with Tommy John.

      so the Nationals are on the hook for all of Haren.

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  3. st says:

    great stuff Wendy. Fangraphs really needed this business angle.

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    • Tom B says:

      All fluff and no substance… Reading this article was a waste of time.

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      • Chicago Mark says:

        I gave a negative response Tom. What substance is available? I’m not certain the insurance company can discuss this. Maybe the Yankees want to let it be known. But Wendy certainly isn’t in the loop for this information.
        Good article W.

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      • Sarcastocrat says:

        All jackassery and no legitimate comment…Reading anything you write is an affront against humanity.

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      • Pirates Hurdles says:

        Tom has a fair point. The Yankees are not in need of saving with more revenue than any other team and without any facts why even make up scenarios regarding the insurance policy. Basically the title could have been “Yankees may save money with an insurance claim” and that could have been the whole article.

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      • Chicago Mark says:

        I disagree PH. There’s a lot learned in the article. The three year policy is very interesting to me. FG is full of speculation with trades, etc. This is more of it. And it’s enjoyable to read. And I’m guessing by the multiple negatve responses to Tom, many would agree with me. Also, are the Yankees “not in need of saving”? I know it’s because of the tax thing. But any way you put it, they are pinching pennies (or millions) like never before. It sure seems important to them to save this money off the cap. Or whatever it is.
        Again….Good article for me.

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      • Cidron says:

        The article isnt solely about the Yankees/Arod contract. It also let us into the world of insurance, how it works, and the impact it has on sports (mlb in particular) contracts. Including salary cap, revenue, etc. Also, it was mentioned that this case (yankee/arod) the details arent known, so alot is speculative, but generally along the patterns and precedents set beforehand.

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    • Wendy Thurm says:

      Thanks. Appreciate the feedback.

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  4. Danny says:

    This is outstanding work. I really enjoy having a lawyer on the Fangraphs team. Goes to show how little we know about how baseball finance really works.

    After following the winter meetings much too closely, I would love to read some technical analysis of negotiations. As you did with this article, maybe you could make some assumptions to fill in the gaps, then walk us through the teams’ decision matrices? Just a thought.

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  5. Chris says:

    I thought that if a player retired while still under contract that they forfeited the remainder of said contract. Isn’t that what Gill Meche did?

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  6. James says:

    Wendy, this is really good stuff. I know this is fangraphs and therefore baseball related, but have you ever looked into this kind of stuff with hockey. It’s really way more interesting. Teams sign a player to an incentive-laden contract, and then insure themselves against the incentives, not against injury. i.e. (I’m a Sharks fan) if Marleau scores 35 goals, maybe he gets an extra $3 million for that. So the Sharks might pay a $1 million dollar premium (numbers are totally made up) to guard against that. That way, management has cost certainty and can still “root” for their players with those incentives to do well. Would love to see you break that down.

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    • Wendy Thurm says:

      I haven’t looked at the hockey scenario, but the standard player contract, salary cap, luxury tax etc issues are different for every sport.

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      • Ray says:

        You state that the Yankees will be on the hook for this contract however it plays out. That is not necessarily true given the following scenario:

        Arod is told by the doctors that medically he can no longer continue playing.
        Yankees contact a small market team such as Miami or Cleveland and make the following offer:

        Yankees send Arod (and pay the remainder of his contract) + 2 B level prospects
        Yankees receive one or two bad contracts from the other team

        The trading partner picks up prospects while shedding its own bad contracts at no cost to them (they are likely never to approach the cap). The Yankees receive the cap relief they are seeking.

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        • Iron says:

          Selig is not likely to approve any trade that is a transparent attempt to circumvent the luxury tax. Any trade involving a retired or effectively retired player would be just such a transparent attempt.

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  7. jcxy says:

    Sorry, basic question: would this be an OTC policy or do many firms compete in this market?

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    • Wendy Thurm says:

      There are a few firms in the market.

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      • James says:

        I guess the answer is no? I am considering the fact that you answered an irrelevant add-on to the original question, but not the question itself.

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    • Chicago Mark says:

      Not certain what OTC is over the counter?). But the question was OTC OR many firms. Answered…..There are a few firms in the market.

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      • jcxy says:

        I meant to put “and” but I think we can surmise the answer. I was wondering–and what Wendy answered (thanks!)–was whether multiple firms offered this service.

        And yeah, OTC=over the counter in that the team approaches an insurer and they develop a player-specific policy rather than broadly applied athletic risk tables.

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  8. Brandon T says:

    Couldn’t the Yankess trade AR (an insurance policy) to a team with lots of cap space and pick up the freight, perhaps along with a few knickknacks to make it worth their time? The Yankees clear him off the cap and the other team gets a prize…

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    • joser says:

      1. There is no “cap”; there’s a threshold where the luxury tax rate shoots up. The Yankees are trying to get under that so that they can reset the rate (they only have to be under it for one year to get the reset). This isn’t football/hockey/basketball.
      2. If the Yankees “pick up the freight” — by which I assume you mean they’re paying his salary — then that still counts towards the tax. The only way they can get AR’s salary off their books is by trading him to a team that agrees to pay it, or by having him retire and forfeit the remainder.

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      • Brandon T says:

        Yup, brainfart there, sorry.

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      • Brandon T says:

        On the other hand, they only have to pick up the freight that the insurance doesn’t cover. Can’t see the commish vetoing it, even if it’s obvious, as long as SOMETHING goes the other way.

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      • Preston says:

        Getting the insurance money doesn’t help against the AAV of the deal. Until Alex Rodriguez retires, and I think it would take at least three seasons of under 50 games played to induce that. The Yankees have him as part of their luxury tax figure.

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      • Tom says:

        Joser – while what you say is true ARod is a bit of a unique case due to the contract structure (specifically that it is declining below AAV in the out years)

        The acquiring team gets the luxury tax AAV (minus whatever actual salary the trading team is subsidizing). The Yankees luxury tax impact would be paying only what they are subsidizing.

        The key here is starting in 2014 his actual salary dips below the AAV that goes into the luxury tax calculation (27.5mil). So even if the Yankees (or the insurance) are paying almost all of the salary there is some savings from a luxury tax perspective. He gets I think 26 mil in 2014 down to 21 mil in his final year. So basically if the Yankees were paying all 21mil in 2017 that would be their luxury tax # for ARod, the acquiring team would be on the hook for 6.5 mil (even if they aren’t paying actual salary).

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    • Baltar says:

      The commisioner can and does veto this kind of move to escape the luxury tax. Nice try, though.

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  9. M says:

    Do players in other sports get insured by teams (and how would that effect a salary cap)?

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    • Boomer says:

      Not sure, but I have read that most NFL contracts do not guarantee salaries so I would guess there’s not much demand for insurance there expect for big guaranteed contracts.

      I recall reading that there was some contract insurance written for the NBA but I can’t remember where.

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  10. dp says:

    Curious if the Yankees could just outright Arod to AAA, if he accepts the assignment wouldn’t that clear his salary from luxury tax?

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  11. Matty Brown says:

    If I were the Yankees, I’d have a Red Sox fan perform the surgery.

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    • snack man says:

      They may also have minimal insurance (35% of the contract) or the policy may expire at the end of 2012 and be up for renegotiation this winter.

      The thing that this makes me thing is that there is a large hidden cost to these huge contracts that really should be counted in WAR/$ calculations.

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  12. Pft says:

    The main reason the Yankees want luxury tax relief is because of the revenue sharing rebates which could exceed 40 million by 2016 and 20 million in 2014 (50% rebate of revenue sharing to large mkt teams)

    If the Yankees can recover 20 million from Arods salary in 2013 or 2014 they will be happy since this is the approximate amount of lost revenue sharing rebates in 2014 for being over the luxury tax threshold.

    If I am the Yankees I don’t want Arod coming back in 2013 at less than 100% in what looks to me like a lost season for them with all the holes they have. I found it interesting Arod is delaying his surgery until middle of January which could mean he will play along.

    Also, I am pretty sure the insurance coverage must have an option that allows it to be extended beyond 3 years if Arod is disabled with an injury that occurred while he was covered.

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  13. scraps says:

    The Yankees and A-Rod could end up in a dispute over whether he should play after his rehabilitation is completed.

    Half a year later: spooky.

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  14. That Guy says:

    Uh, “First”?

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  15. swieker says:

    Welp, this article outlines a possible reason for why Cashman thinks Alex “should just shut the f*&% up.”

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