Thursday, March 28, 2013
Why Mets did not insure Johan's contract
By Adam Rubin
PORT ST. LUCIE, Fla. -- The Mets will be on the hook for the remaining $31 million owed to Johan Santana because they did not insure the contract.
Here's an explanation, amended from an April 5, 2011 write-up:
As premiums have skyrocketed because of escalating salaries and past payouts -- such as the bailout when Mo Vaughn was owed $17 million and could not play for the Mets in 2004 -- the organization began more often “self-insuring” its larger contracts than seeking outside coverage. In essence, the Mets chose to create a rainy-day fund available so that the organization would not be crippled financially by the loss of a key player due to injury.
It saves potentially a $2 million insurance premium per year to protect a contract, although the amount annually paid to an insurance company naturally decreases as the years on the contract elapse -- like you’d pay less to an insurance company on a car as the years go by and the vehicle is worth less.
Across baseball, outside insurance has “declined tremendously,” according to one baseball official.
Santana was self-insured by the Mets, whereas the Mets contracts for Carlos Beltran, Jose Reyes, Tom Glavine and Mike Piazza’s were insured externally during their Mets days as well. David Wright's last contract also was insured externally.
Insurance generally covers the salary after a deductible period -- usually either after the player has missed 60 or 90 days of games.
Policies can exclude particular body parts if the player has been injured there in the past.
John Scotti, whose Pittsburgh-based Team Scotti handles the majority of the insurance coverage for major league teams, explained: “Clubs who benefit the most from this type of coverage establish a risk philosophy which spells out what contracts they would or would not insure. Generally the main components setting the philosophy parameters are whether the player is a position player or pitcher along with the monetary size on the contract and length of contract.”
As for how escalating salaries have affected insurance, Scotti said typically a policy only pays out if the incapacitation occurs in the first three years of the contract now, whereas it used to be five years.
Said Scott: “What this means is a club can insure a five- or 10-year contract, but the injury or illness must occur within the first 36 months in order to receive benefits in years four, five, six, seven, eight, nine or 10 as long as the disability has continued to be the cause of his inability to perform.”