Insurance in Baseball is Like a Black Hole

How much gravity does insurance have in Major League Baseball front office decisions?

Puns aside, let me tell you the funny thing about a black hole. You see astronomers cannot really see one, instead they are detected through their effects on the universe around them. Although less extreme, insurance is similar in this regard on its impact on baseball teams. Most teams insure some of their larger contracts in case their players cannot play due to an exterior factor such as injury. Perhaps the impacts of this major facet of the game does not cross our mind often because it is not eminently visible. However, make no mistake that insurance is a major factor when teams make major decisions regarding the DL, contract extensions, playing time and so on.

First, consider the history of baseball insurance to better understand why it impacts baseball. It can be said that by the late 1990s it had become common place for teams to insure their larger contracts. The first time baseball and insurance first truly started getting media attention was with Albert Belle in 2001 due to confusion over his insurance contract. Albert Belle had suffered a career-ending hip injury with the Orioles. Fans grew excited however despite the disheartening news when in 2002 the all-star slugger was added back onto the Orioles’ 40 man roster. Disappointed Orioles fans can tell you that Belle never played another MLB game however. Instead, he was added back onto the 40-man roster so the Orioles could collect insurance on his contract (some MLB insurance contracts do not cover a player unless they remain on the 40-man roster). At the time the MLB insurance contract covered the remainder of the salary owed on Belle’s contract. According to writer Michael Branda, the Orioles recovered an astounding 27.3 million out of a 39-million-dollar loss represented by Belle’s injury. Since the huge losses on Belle’s contract in the early 2000s, insurers in baseball have become much more stringent with their underwriting in baseball contracts.

Belle was not the only reason for teams being more stringent with their underwriting. The associated risks with insuring a MLB player have increased. One reason is PEDs. The MLB really did not enforce its ban on PEDs up until the late 2000s, but now being caught using PEDs can result in a significant loss in playing time. According to MLB Trade Rumors a syndicate of the MLB, Ervin Santana a first-time offender was suspended for 80 games on April 3rd of 2015. Santana was expected to make 13.5 million dollars this season. Despite being suspended, the Minnesota Twins are expected to still have to pay half of Santana’s salary (only players caught for the second time or more for steroids lose most of their salary).

To account for this insurers enforce a 60 to 90 day deductible policy in order to shield themselves from these sort of losses as well as claims made for short-term injuries. In addition to the 90 day deductible insurance policies are typically term policies of about three years with an option for renewal after the conclusion of the contract. As a result, if a contract proves to incur severe losses the liabilities will be only in the short term. Obviously to further protect themselves insurers only cover players with no preexisting injuries and all players must be inspected by the insurer. Furthermore, with wide variability and unpredictability in player health an insurer can in a way readjust its rate every three years to better reflect the player’s risk of not playing.

These more stringent underwriting practices have influenced the game, oftentimes when deciding when to take a pitcher off of the DL. Adam Kilgore of the Washington Post explained it best when he talked about how in 2012 Stephen Strasburg was “shut down” during a playoff push for the Nationals due to potential health concerns. In this decision there appeared to be a delicate balance between contention and the considerations of the insurance company that would not have covered Strasburg if he had been injured due to these health concerns. It is not crazy to think that finances come into play when making a decision on baseball players. Jeff Moorad, a decision maker for the Padres explained that in 2010 Chris Young was eligible to come off the DL. The Padres ultimately chose to put Young back on the field but Moorad added, “the accounting department much preferred that he [had stayed] on the disabled list.”

Baseball insurance has grown steadily more expensive. Although it is difficult to ascertain how much a team actually spends on insurance it is clear that it can be a burden for smaller teams. For instance, the Arizona Diamondbacks’ rotation once featured the dominant starting pitcher Brandon Webb. Between 2006 and 2008 Brandon Webb made three all-star games and finished first, second and second respectively in Cy Young voting. In this span Webb also led the league in innings pitched once. In essence Webb was due for a large payday once his contract expired. However contract negotiations between Webb and the Diamondbacks hit a snag in June of 2008. Despite a track record as a durable starter, no insurance company was willing to write a policy for injury risk to the Diamondbacks hurler. The reason is because insurance companies refused to accept the risk of Webb injuring his arm or if they were willing to, they were going to charge exorbitant rates.

As a result, the Diamondbacks could not get an insurance contract that did not have an exclusion on arm, shoulder or elbow injuries, all vital and injury-prone body parts for pitchers. According to AZCentral, a news outlet that covers the Arizona Diamondbacks, due to Webb not being insurable the Diamondbacks broke off all contract negotiations. In the long run, this proved to be a smart move since ten months later after contract talks ceased Brandon Webb never pitched in the majors again due to injuries. The point of this is that not only is baseball insurance so expensive it can prove to be impractical, it shows that most insurers are unwilling to insure some pitchers. Walt Jocketty, the former general manager for the middle-market St. Louis Cardinals explained that insurance has “become so expensive that it’s a cost item we really have to look at when you put your payroll together.”

In addition to insurance contracts altering how teams manage their rosters they influence how teams treat their players. In essence there is a human side to these contracts. Consider Josh Hamilton who is in the middle of a massive five-year, 125-million-dollar contract with the Angels and who has been playing quite ineffectively relative to his salary. Josh Hamilton who recently suffered a relapse on his drug addiction before the 2015 season is a prime example of insurance influencing teams to treat their players in a way they hopefully normally would not. Despite being a repeat offender, an arbitrator chose not to suspend Hamilton for any period of time. What makes this story scandalous is the Angels’ seemingly acerbic response to this news. It appears that the Angels almost wanted Hamilton to be suspended to spare them the expense of his failed contract. Clearly the Angels have little incentive to help Hamilton recover from his addiction. Instead, it is in their interest to see that Hamilton never plays another game of baseball again because if he does not play for an extended period of time the Angels can potentially collect insurance and definitely reduce their payroll.

Insurance influences baseball more than many people may realize. When it comes to playing time, DL decisions and contract negotiations, insurance seems to be an integral piece in the decision-making process. For me though, part of what makes baseball great is the inherent competition of players, often with disregard to their own body (*cough* Adam Eaton *cough*). There is little harm of teams protecting themselves from the inherent risks of baseball players becoming injured. The risk is that insurance becomes an incentive for teams to make decisions that may be bad for the game, such as not playing players for financial gain. Let’s hope that ultimately, teams do not get engulfed into this black hole.

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7 years ago

Really interesting article on this. Was Strasburg exiting a 3-year window when the insurance would have to be renewed, or was insurance on him just exorbitantly expensive after his surgery?

And wouldn’t an insurer refuse to insure lost playing time for Hamilton due to a relapse? Or are the Angels hoping he has to stop playing due to an “injury”?

7 years ago
Reply to  Titubs

Interesting. So for Hamilton, if he misses just the one month for injury and nothing else, the Angels get nothing because it doesn’t meet the 90-day deductible.

If he misses a month for injury and two months for rehab or whatever, he is just barely at the 90 days. If he misses the whole year (or his whole rest of his career), the Angels presumably would get some percentage (maybe 75%) of his contract back from the insurer, minus the first 90 days.

If he’s suspended for a year or for life, the Angels get all his money back right away. Interesting.

Thanks for the reply.

7 years ago
Reply to  Titubs

Do you actually have a copy of the Hamilton insurance policy? Seems highly unlikely it wouldn’t exclude coverage of a drug suspension.

7 years ago

I was thinking about Phil Hughes’ incentive last year that he just missed and I wonder if more teams ought to think about building contracts mostly on incentives as their own sort of insurance/arbitrage strategy.

So instead of paying free agent Johnny Cueto $180 million for 8 years (or whatever), you build in lots of complex incentives, either per year or per the life of the contract.

I don’t know whether you’d base it on FIP or WAR or ERA or whatever, but it would need to be something that appropriately values his impact on the team’s chances of winning.

Say $5 million for every year of the contract he gets 0-1 WAR, $12 million for 1-2 WAR, $20 million for 2-3 WAR, $26 million for 3-4 WAR, $35 million for more than 4 WAR.

There are obviously all sorts of problems with this, from which WAR do you use to the question of whether WAR accurately measures his real worth. But it would make for an interesting contract.

The signing team is protected against Cueto bombing in any year, since they’d pay him only $5 million. And if he pitches fairly well but not outstandingly, he gets his $20 million per year (which would be roughly market value if he’s at 2.5 WAR). If he pitches fantastically in any year, he makes $35 million, well above market value. Presumably, the signing team would be happily willing to pay that.

The biggest issue might be a team’s inability to budget into the future. But if you did this kind of thing with several players, you could look at it as literal $ per WAR, rather than saying “We have $45 million wrapped up in our rotation.”

7 years ago
Reply to  dl80

That idea has been discussed numerous times and at length. The short, and end of it is that the MLBPA would never approve any contract that resembles what you are suggesting.

7 years ago

Great article on a hidden element of roster construction. I had never considered the effects of insurance in baseball before. Good stuff!

7 years ago

Who exactly sells this kind of insurance?

More most kinds of insurance, you have a really large base of policies and potential claims so you can analyze the historical experience and adjust the rates. I don’t know if this applies well to baseball, especially when the potential claims are concentrated heavily on the few players with huge contracts.