An Introduction to: Disability Insurance 3, Baseball Fans 1 

An Introduction to: Disability Insurance 3, Baseball Fans 1

An Introduction to: Disability Insurance 3, Baseball Fans 1

By: Keith Dobkowski, Sports and Legal Issues
Keith@sportsbusinesssims.com
V.P. of Sports and Legal Research

The Major League Baseball Winter Meetings came to a close on Monday, December 15, 2003. ESPN analysts have called this the hottest winter meetings of all time. Leading with the Alex Rodriguez (pictured below) rumors and the signing of Miguel Tejada by the Baltimore Orioles for 6-years and $72million, this years annual winter meetings have been hyperactive.

[img=file:///C:/My%20Documents/SBS/arod.jpg]AROD[/img]

As exciting as all the transactions are, or as painful for some teams, avid sports fans must not only ask who is where, by why is there so much movement?

o Why is this the hottest hot stove of all time?

o Why are so many players changing teams?

o And what will the end result be of all the transactions?

In my working paper entitled, "Disability Insurance 3, Baseball Fans 1" I tackle this issue directly. My paper, along with numerical data, comparisons to other professional sports leagues and a proposed solution has been made available by Sports Business Simulations, Inc., and can be found on their website at www.sportsbusinesssims.com under the working paper section.

My theory is as follows: Beginning in the 2002 off-season, disability policies were limited to 2 to 3 year increments, as opposed to the entire length of the contract. While this change in policy length appears simple on its face, it creates a huge problem for all of Major League Baseball.

When a baseball player signs a contract with a team, the contract is figured in terms of years and salary. Many contracts contain options and bonuses for performance goals. For example, Barry Bonds (pictured below) received a monetary bonus as part of his contract for winning the Most Valuable Player award. Player's contracts often provide escape clauses for the organization in regards to dangerous off-field activities. Such excluded activities often include skiing and motorcycle riding. The contract between a player and team is normally guaranteed, meaning that the years and money offered must be paid in full. Due to the high risk of injury, teams take on an additional cost by insuring the health of their players, essentially insuring the contract money.

[img=file:///C:/My%20Documents/SBS/bonds600th1ss.jpg]Bonds[/img]

For instance, if player A were to sign a 5 year, $10million contract to play for Team, and player A were to break his leg in year one, making player A unable to play out the remainder of his contract, the Team could file a disability insurance claim to receive back a large percentage of the lost salary.

The risk that exists occurs from the frequency and unforeseen nature of injuries. Cal Ripkin played in 2632 straight games, while Albert Belle's injury sidelined his career in 2000. Due to the unforeseen nature of injuries, Insurance companies have limited the length of Player coverage they will offer. Beginning in the 2002 off-season, disability policies were limited to 2 to 3 year increments, as opposed to the entire length of the contract. While this change in policy length appears simple on its face, it creates a huge problem for all of Major League Baseball.

Recall the above hypothetical where player A signs a 5-year, $10million contract to play for Team. Under the new disability system that limits the length of coverage, if player A were to sustain an injury in year one that kept player A from playing the rest of the five years for Team, Team would be limited in the amount of money Team could recover. Under the old disability coverage, Team could have Insurance Company pay for a large percentage of player A's salary. Under the new coverage limits, Team would only receive coverage on player A for two to three years and Team would then be responsible to pay player A's salary in whole for years four and five.

When Insurance Companies limit the length they will insure a player's contract for or even offer insurance to, a team is less willing to accept the risk involved in offering a long-term contract to a player. Most likely, a team will offer a player a contract of the same length of the insurance policy, two to three years. Every year there will prove to be exceptions, but for the most part, this practice will hold true. The net result is as follows.

Short contracts leads to greater turnover of players. Greater player turnover leads to less familiar teams being fielded. The less familiar a team appears to a fan, the more work a fan must put forth in order to root for the fan's favorite team or even to recognize the team. More work by the fan leads to greater disenchantment by the fan. And eventually disenchantment will drive fans from the game of baseball.

My theory has held true as in 2002, the average player received a contract of approximately 2.7 years in length. In the 2003 season, after the new disability insurance rules went into affect, the average players contract was only 1.6 years in length, over a 40% drop in contract length.

As of January 10, 2004, the average free agent player contract was only 1.3 years in length, over a 50% drop from two years ago.
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All information offered can be found in my working paper entitled, "Disability Insurance 3, Baseball Fans 1." My paper, along with numerical data, comparisons to other professional sports leagues and a proposed solution has been made available by Sports Business Simulations, Inc., and can be found on their website at www.sportsbusinesssims.com under the working paper section.

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My other articles are available at:

sportslaw.blogeasy.com
ncaalaw.blogeasy.com
nfllaw.blogeasy.com
mlblaw.blogeasy.com

www.sportsbusinesssims.com