Show Me the $$$Policy$$$
By Robert Warne - November 30, 2001The line “Show me the money” was made famous by Cuba Gooding Jr. in his role as Rod Tidwell in the 1996 Hollywood hit Jerry Mcguire. But true to form, Hollywood seemed to leave out crucial details that just wouldn’t fit into the script.
If Tidwell said, “Show me the policy,” then the story would have played out completely different. In fact, if Tidwell had a policy to minimize the liabilities associated with injuries and guaranteeing him a certain salary level, then the movie probably wouldn’t have been made.
Insurance has become the financial backbone of the wide world of sports. With millions at stake involving players, teams and corporations, the strategy in the business of sports has been to spread the risk and liability.
Recently Cleveland Indians free-agent Juan Gonzalez secured his own $50 million personal disability insurance policy to quell any teams’ fears of hiring him. The 32-year-old outfielder has a history of back problems along with other ailments that could limit the length and size of a contract he might sign with a clubhouse. By securing his own disability policy he has positioned himself as a solid long-term investment, complete with his own extended warranty.
Gonzalez’s free agency coincidentally falls in the same year as Barry Bonds’ and Jason Giambi’s. The sports agents that represent these three players are doing everything possible to position their player as the player of choice. Gonzalez’s insurance policy, that reportedly carries no exclusions and can be transferred to any team, only sweetens the deal.
In the age of mega million dollar contracts, insurance plays a vital role for both the player and the organization. High profile players are a big draw for fans. So if a star player is injured, a team may not only lose games, it may also lose fan driven revenues.
Mark McGwire sat out the 2000 summer due to an injury. The St. Louis Cardinals were prepared and had an insurance policy on Big Mac from Aon Corp. Based on the figures that Big Mac was responsible for drawing 600,000 fans a season—representing $20 in revenue each—the Cardinals reportedly were able to recover over $4 million from Aon. The $500,000 it cost them to renew their $12 million policy on Big Mac was definitely money well spent.
Brian Burns, chairman of Pro Financial Services in Schaumburg, Ill. told the New York Times after Alex Rodriguez’s record $252 million deal with the Texas Rangers, “Most coverage is written at the 70 percent level, so a $100 million contract can be insured for $70. But a $252 million contract would be insured at 38 percent.”
Rodriguez’s premiums are estimated to be in the neighborhood of $4 million per year.
An example of this equation in action is what happened to the Baltimore Orioles’ Albert Belle. With three years to go on his contract worth $39 million, Belle was forced into retirement because of a bad hip. The Orioles were able to recover $27.3 million from their insurance policy on Belle. Some are blaming Belle’s early retirement for causing the insurance industry to re-evaluate the way risk associated with underwriting sports superstars is treated.
While sporting industry salaries continue to push the envelope, premium levels have started to respond in similar fashion. Over the next few years experts predict an increase in insurance premiums ranging anywhere from 35 percent to 250 percent for major sports contracts. So on a $100 million contract the cost may rise from approximately $2.1 million to roughly $7.35 million. Also, teams may only be able to insure players for short periods of time.
Teams are expected to incorporate new insurance strategies to amortize their liability exposure. One option is to sign players to shorter contracts. Another option is to buy less insurance or opt for a higher deductible in exchange for a lower premium.
The deductible on Alonzo Mourning’s insurance policy was 41 games, according to Sportsline.com. So when he missed most of last season due to kidney problems, the Miami Heat paid most of his $16.9 million salary.
Gonzalez’s move to secure his own insurance is not without precedence. Greg Maddux during his last year with the Chicago Cubs acquired a policy to guarantee the salray he expected in his next contract. This type of insurance is called, “future value liability insurance.”
College players who expect to be drafted in the first round also purchase this type of insurance. Indianapolis Colts quarterback Peyton Manning and Cleveland Browns quarterback Tim Couch each had policies in the $5 to $6 million range before they were drafted, according to Sportsline.com.
Corporate America is dependent on insurance when it comes to endorsement contracts. Events and stadiums also rely heavily on insurance to minimize risk The bigger the dollar amount attached to the player, team, organization or event, the greater the risk and liability potential.
A more realistic Jerry McGuire would have added an insurance policy to the statement, “I will not rest until I have you holding a Coke, wearing your own shoe playing a Sega game featuring you while singing your own song in a new commercial staring you, broadcast during the Super Bowl, in a game that you are winning.” Then Tidwell could have said, “Your policy completes me.”
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