Club policy has shifted on insurance
CLEVELAND -- In the debate over whether the Red Sox should re-sign Pedro Martinez, these are the kinds of questions seldom asked in public but faced by team management:
-- Do you give Martinez the kind of money it will take to get a deal done -- let's say, at least $15 million a year -- if the two insurance companies that offer disability coverage to major league players (
-- Can you give Martinez more than a three-year deal when insurance companies, which used to issue policies that covered five years, now draw the line at three?
-- Do you sign Martinez if insurance covers only 50 percent of the deal, and excludes coverage of shoulder injuries, citing a pre-existing condition in Martinez's case?
-- And is it worth it to sign the Sox ace even if the contract is insured, if the premiums cost the club an additional $1.5 million a year or much higher, depending on whom you talk to?
Insurance costs are a seldom-discussed part of the price of doing business in Major League Baseball, and it was a topic Red Sox general manager Theo Epstein declined to discuss this week, citing his pledge to Martinez to keep details of their negotiations private. But those costs have skyrocketed -- premiums by more than 300 percent -- as companies have paid out hundreds of millions of dollars in insurance claims in recent years and have passed those costs along to teams. "We don't do [insurance] anymore," said Ned Colletti, assistant general manager of the San Francisco Giants. "It's too cost-prohibitive."
When the Cleveland Indians signed pitcher C.C. Sabathia to a four-year, $9.5 million deal -- a far more modest amount than what the Sox and Martinez are discussing -- they elected not to buy insurance, saying it wasn't cost-effective. The Texas Rangers, meanwhile, reportedly agreed to pay $9 million in premiums to insure the first five years of Alex Rodriguez's 10-year, $252 million deal, costs assumed by the Yankees after they traded for A-Rod.
Perhaps the most celebrated case in recent years is Orioles outfielder Albert Belle, whose career was cut short by a degenerative hip injury. The Orioles had an insurance policy that covered 70 percent of Belle's salary in the event of a permanent disability; the insurer paid $27.3 million, the Orioles $11.7 million of the $39 million remaining on the three years of Belle's contract.
There are two firms that underwrite disability insurance for MLB teams: American Specialty Underwriters International, which is based in Woburn, Mass., and Pro Financial Services in Schaumburg, Ill., both of which have done business with the Sox.
"Pitchers by far represent the most risk in all of sports," said Marc Idelson, senior vice president for North American underwriting for ASU.
They are riskier than football players because in the NFL, most contracts are not guaranteed, while in baseball all multiyear deals are fully guaranteed. In the past, Idelson said, insurance would cover as much as 80 percent of a player's contract; now, especially in the case of pitchers or older players or players with an injury history, carriers are willing to cover only 50-70 percent of a contract.
Some big league teams, in addition to insuring individual players, also may buy something called stop-loss policy, in which they buy coverage against the payroll if a certain number of players are disabled in the course of a season.
While neither Idelson nor Dennis Burns, the senior medical underwriter for Pro Financial Services, were willing to discuss Martinez specifically, the big issue in the pitcher's case is whether the insurance companies would exclude his shoulder from coverage. Either way, the Sox can expect to pay at least $1.5 million in insurance premiums for Martinez, though one industry source said that it could be "far north" of that figure depending on the total value of Martinez's deal and what percentage is covered.
"It depends on the nature of the pre-existing condition," Burns said. "If I excluded every pre-existing condition every athlete has, we wouldn't be in business. Some conditions are chronic, like diabetes. There have been other athletes with [cancer]. But there have been such advances in sports medicine, that is a factor. Ten years ago, a torn ACL would end a career. Now a player can be back in a season.
"Pitchers can tear their rotator cuff or their labrum, but if surgery is successful and the players resume their careers, they can be insured. Sports medicine has helped my industry."
But the increase in insurance costs have made clubs much more careful in contract negotiations, Burns said.
"Teams used to be able to budget in 80 percent coverage," he said. "But not anymore. There are higher premiums, higher deductibles, and lower co-insurance factors.
"If a player is a bad risk, he's a bad risk. Let's say you exclude a pitcher's elbow. There are a lot of other things that can go wrong with a pitcher besides his elbow, because it's all about mechanics. You exclude the elbow, and he hurts his shoulder. We've seen that happen many times before."
Three years ago, Martinez was diagnosed with a small tear in his labrum. He never has had surgery, and while he is not a power pitcher like he was before he hurt his shoulder, he has remained an elite pitcher. Ten years ago, whether or not to pay to insure him almost certainly would not have been an issue. Jimmy Key of the Yankees tore his labrum and missed most of one season, and he was insured.
But the costs, and risks, for everyone involved were a lot less then.
