Insurance Programs to Protect Future Earnings

Do amateur athletes have disability insurance options to protect their potential future earnings as a professional athlete?  What if the player suffers an injury/illness that is not career ending but significantly decreases the athlete’s value? What is the eligibility for coverage?

This report is designed to explain what disability coverage options may be available for athletes and how they work.

What is permanent total disability coverage?

Permanent total disability (PTD) coverage protects a player who suffers an injury or illness during the designated coverage period which prevents the player from ever competing as a professional athlete (i.e., must be a career-ending injury or illness).

Permanent total disability coverage is 24-hour accident and sickness coverage, including the playing and practicing of the player’s sport. The benefit amount (payable in a lump sum) and pricing is determined by insurance underwriters based on the sport, projected draft position and injury history. The medical underwriting process includes an application and physical exam, and exclusions for specific pre-existing injuries or illnesses may apply. The waiting period is 12 consecutive months from the date permanent total disability is determined before benefits are payable.

What is loss-of-value coverage?

Loss-of-value (LOV) coverage protects the player’s future contract value from decreasing below a predetermined threshold amount from a significant injury or illness suffered during the designated coverage period.  The insurance industry mandates that loss-of-value coverage must be purchased in conjunction with permanent total disability coverage and is typically purchased for the year prior to the player becoming draft-eligible.

Similar to permanent total disability coverage, loss of value is 24-hour coverage and medical underwriting is required. Exclusions for specific pre-existing injuries or illnesses may apply.

How does loss-of-value coverage work?

Step 1 – determine eligibility

The insurance underwriters will determine eligibility for loss-of-value coverage based on the athlete’s projected draft position. If the player is projected to be selected early enough in the draft to be eligible, the insurance underwriters may offer a loss-of-value coverage limit, typically between $1 million and $10 million based on the projected draft position.

Step 2 – set threshold

The insurance underwriters will set a loss-of-value threshold, which is typically 50 to 60 percent of the athlete’s projected rookie contract.  Some insurance underwriters will break down the threshold into an average amount per year to determine the loss-of-value benefit when the maximum contract offered is a different length from the projected rookie contract. This could result in different claim payment amounts depending on carrier and underwriter.

Example:

The player’s projected signing bonus is $5 million total

  • Projected rookie contract x 60 percent = Loss-of-value threshold
  • $5 million x 60 percent = $3 million loss-of-value threshold
Step 3 – determine benefit

If the maximum contract offer the player receives is less than the threshold amount solely and directly as a result of a significant injury or illness, the player could be eligible for a loss-of- value benefit based on the difference up to the coverage limit.

Example:

  • Player’s projected signing bonus is $5 million total
  • Player’s loss-of-value threshold is, $3 million total
  • Player is offered a signing bonus contract, $1 million total
LoV threshold Contract offer LoV benefit
$3 million  $1 million = $2 million

However, if the maximum contract offer amount exceeds the threshold amount, the player is not eligible for a loss-of-value benefit.

Example:

  • Player’s projected signing bonus is, $5 million total
  • Player’s loss-of-value threshold is, $3 million total
  • Player offered a signing bonus contract, $3.5 million total
LoV threshold Contract offer LoV benefit
$ 3 million < $3 million = None payable

Loss-of-value important coverage terms and conditions

The important thing to remember is that having a loss-of-value policy, suffering an injury or illness and then falling in the draft does not guarantee a claim is payable. Proving an injury or illness is solely and directly the reason for the decrease in the athlete’s value may be difficult.  Some of the factors that may cause a decrease in value that are not covered include:

  • Off-field issues
  • Poor performance during the season
  • Poor performance at a draft combine
  • Player was surpassed in the draft due to another athlete’s superior performance
    • Professional team’s needs changed (i.e., team made a trade before the draft and no longer covets a quarterback with its first-round pick)

The policy wording even has an exclusion that applies for the athlete not receiving an offer from a professional team that totals the threshold amount or more of compensation for any reason other than due to injury or illness as defined.

It is also extremely important to read the definitions and exclusions very carefully.  Below are examples of the definition for injury and illness, along with standard policy exclusions found in a loss-of-value policy, which may vary.

Definitions

Injury: Bodily injury sustained by the insured athlete during the period of this insurance which requires medical treatment by a physician, and has negatively affected the insured athlete’s skills in a manner that causes substantial and material deterioration in his ability to perform in his occupation.

Illness: Illness first manifested in the insured athlete during the period of this insurance which requires medical treatment by a physician, and has negatively affected the athlete’s skills in a manner that causes substantial and material deterioration in his ability to perform in his occupation.

Standard policy exclusions

  • Pre-existing injuries and illnesses
  • Osteoarthritis, cumulative injury or degenerative joint disease
  • Drugs or alcohol
  • Criminal act
  • Suicide or intentional self-injury
  • Mental, nervous or psychological disease or disorder
  • Act of war
  • Act of nuclear, chemical or biological terrorism

Loss-of-value marketplace

Lloyd’s of London writes the majority of loss-of-value policies on athletes. There are multiple Lloyd’s wholesalers offering a loss-of-value product, but the policy wording and scope of players they are willing to offer coverage on can vary significantly.

Some of these Lloyd’s wholesalers include:

  • International Specialty Insurance
  • Exceptional Risk Advisors
  • Hanleigh Insurance
  • Petersen International

The Lloyd’s loss-of-value marketplace has a very limited claims history. The flood of athletes currently seeking loss-of-value coverage and pending Lloyd’s lawsuits for denied claims will impact this tenuous marketplace.

The annual premium estimate for $1 million of loss-of-value and permanent total disability coverage ranges between $10,000 and $20,000. The premium rates may vary by sport, with the rate for coverage on a football player being higher than a basketball player.  Rates are subject to change, and could be significantly higher depending on the individual.

Best practices

Always be sure that you know what coverage you are buying. Get multiple quotes, from multiple underwriters. Make sure that you understand the terms and conditions of the policy before purchasing anything. Don’t be afraid to ask a lot of questions and ask if some exclusions can be removed or definitions can be reworded. Review the exclusions and make sure the following exclusions are removed when underwriting is completed (exact wording may vary):

  • Coverage will exclude any claims arising from injury and/or sickness to any part of the body for which the insured person has been recommended and/or given any medical treatment by a qualified physician during the 18-month period before the effective date of coverage.
  • Coverage will exclude any claims arising from osteoarthritis, cumulative injury or any other degenerative process of the joints, bones, tendons or ligaments.

During the underwriting process, be as thorough as possible on the application. It is best to err on the side of being over-inclusive when disclosing a athlete’s medical history.  A potential claim could be denied due to the athlete omitting something from the application, even if the omitted item has nothing to do with the injury or illness suffered.  Make sure the athlete is involved in the application process.  The application must be signed by the athlete; however, they should not be signing a blank application to be completed by a parent, coach, trainer, etc. The athlete should be involved in providing the answers to the questions.

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