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Will Insurance on A-Rod’s Contract Save The Yankees?
Posted By Wendy Thurm On December 7, 2012 @ 1:00 pm In Daily Graphings,Featured,Yankees | 49 Comments
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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