Stephen Strasburg’s shutdown and how baseball teams insure contracts

September 5, 2012
Stephen Strasburg
(Alex Brandon/AP)

When Scott Boras brought up legal ramifications pertaining to Stephen Strasburg’s impending shutdown, many mistakenly assumed he meant the threat of a lawsuit. In reality, Boras alluded to an often-overlooked aspect of baseball’s financial order – the insurance policies teams take out on player contracts to financially protect themselves in the case of injury.

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 bases 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.

In 2009, the Nationals drafted Strasburg and signed him to a four-year, major league contract worth $15.1 million, which included a $7.5 million signing bonus. Burns said that a standard insurance policy would treat the signing bonus as part of a prorated salary, spread over the course of the contract.

Boras had insisted the insurance policy for Strasburg’s contract could be voided if he pitches against medical advice and injured himself. Representatives from multiple specialty insurance companies backed the claim.

“Absolutely, it does” sound feasible, said Colin Fairlie, a vice president at Sutton Special Risk. “And frankly, I wouldn’t think that that would happen very often. What do you have a medical staff for if you’re not going to depend on their advice?

“There may be circumstances where maybe you really need him to pitch, if you’re in a pennant race or something, maybe you gamble. If a guy is coming back from serious surgery and the doc says he shouldn’t pitch – I’m talking from the insurance companies. If the doctor says he can’t pitch, you better not pitch him, because you’re on your own if something happens to him.”

Burns said players almost never play against the advice of medical personnel. The most famous example came from football, when Terrell Owens returned from a fractured fibula against doctor’s advice to play for the Eagles in Super Bowl XXXIX. If he had re-injured himself and missed the next season, “the disability insurance would not have covered that,” Burns said. “You have to be cleared medically to play.”

The issues surrounding the Nationals’ insurance policy on Strasburg’s contract would seem to be a tad murkier. He is not returning from an acute injury, and the medical science on Tommy John recovery is less concrete than, say, healing a broken bone. Still, while both Fairlie and Burns had not studied the Strasburg case intently, they said an insurance company would probably have the legal ground to void the Nationals’ policy if he continued pitching this fall.

Just in case it is not obvious, the Nationals did not reach their hotly debated decision to shut down Strasburg based on the insurance of his contract. I just got curious about how the whole thing works after Boras’s comments, and this was good window into exploring that part of a baseball’s business.

One aspect of the insurance is instructive. Burns said that the premium on a young pitcher typically runs 3 to 5 percent, an unusually high premium. “There is a high frequency of disability,” Burns said. “That’s the nature of the job.”

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