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How Student-Athlete Insurance Protects Financial Futures
Here on the OppLoans Financial Sense Blog, much of what we write is about helping people protect their financial futures. That’s why we regularly blog about building your savings, earning extra income from a side hustle, repairing your bad credit, and steering clear of predatory no credit check loans. A good deal of the advice we give is true no matter who you are.
But some people have financial futures that are far, far different than ours. And that means the way they protect their money is unique as well!
One of the groups that this applies to is high-level college athletes, especially in men’s sports. These guys stand to potentially make millions (and millions!) once they go pro. But at the same time, one wrong move on the field or an awkward fall on the court could make those millions disappear in a flash!
(Imagine if Deshaun Watson had torn his ACL last season instead of after he was drafted. It could have changed his entire career trajectory. One thing that wouldn’t have changed? The Texans would still be stuck starting Tom Savage.)
That’s where insurance comes in. And, sure, lots of us have insurance coverage, but we don’t have coverage quite like the kind that’s offered to these high-level athletes—in both college and the pros.
Let’s find out some more about it, shall we?
Exceptional Student-Athlete Disability Insurance
In 1990, the NCAA (the body that governs college athletics) started a program that sponsored disability insurance for “exceptional” student-athletes. Originally, the program only covered football and men’s basketball, but by 1998 it had expanded to include all men’s and women’s sports.
The policy offered through the program is called Permanent Total Disability Insurance or PTD. Simply put, if the athlete suffers an injury that forces them to give up a career in pro sports, the policy will pay them out a large sum to cover the potential earnings that they’ve lost. The policies have a maximum coverage of $10 million for football and men’s basketball, $5 million for baseball, $3 million for men’s ice hockey, and $250,000 for women’s basketball.
The program allows players to take out a loan to cover the cost of the insurance premiums—which often cost tens of thousands of dollars. Once a player receives their pro contract, they can simply pay the loan off and be on their merry way.
In the decades since these policies were first offered, the market for them has grown at a phenomenal rate. And players don’t have to get their contracts through the NCAA’s program either. Many players now secure policies on their own—although the contracts must still be submitted to their school’s compliance office for approval.
Here’s the rub. These policies only go into effect if you’re injured and can never play your sport again. If you get hurt and fall from a top ten draft pick to a late fourth rounder but still end up having a pro career, this policy isn’t going to cover you. In 2016, NCAA director of travel and insurance, Juanita Sheely told a reporter from CBS Sports that “More than two and less than a dozen” of these policies have ever been paid out.
That’s where insurers started getting creative.
Enter Loss-of-Value Insurance
These are riders (also known as LOV’s) that can be attached to PTD policies and they cover exactly the kind of scenario that we mentioned above: an athlete with top pick potential who gets injured and drops far in the draft.
With all the major sports, the potential contract that an athlete can sign gets smaller and smaller the lower their draft position. For instance, Myles Garrett, the first overall pick in the 2017 NFL draft has a contract valued at over $30 million, whereas Ryan Ramcyzk, the 32nd overall pick—and the last player picked in the first round—has a contract valued at just below $9 million.
Slipping in the draft could cost a player millions in guaranteed dollars. When a player takes out a PTD policy, they can also get a Loss of Value rider added to protect against that loss.
The first NFL player to collect on his LOV rider was running back Silas Redd, who suffered a knee injury during his final year at USC and ended up going entirely undrafted in 2014—although he did eventually play professionally for Washington D.C. The second player to collect—and the first do so with some fanfare—was University of Oregon cornerback Ifo Ekpre-Olomu, whose knee injury in 2014 right before the Rose Bowl caused him to drop from (very likely) the first round to the seventh.
There are two factors that have contributed to this increase in popularity for LOV riders. The first is that student-athletes can now take out loans secured against their future earnings in order to pay the expensive premiums. The second is that the NCAA also allows schools to pay those premiums themselves with money from the NCAA’s Student Assistance Fund. In fact, Ekpre-Olomu was one of four University of Oregon athletes, including then-quarterback Marcus Mariota, who had his premiums covered by the school for the 2014 season.
Eric Chenowith is a former NBA player and insurance producer at Parq Advisors, where he specializes in disability insurance for college. and professional athletes. He says that he has seen the market for LOV coverage grow “drastically” over the past five years:
“Originally, the only part that was available was Permanent Total Disability and, honestly, the chances of collecting on that are, honestly, probably less than one percent. And so a lot of guys just didn’t want to secure it. Loss of Value was around about ten years ago and then it went away and then it came back about 5 years ago and so it’s a sexier product in that it’s a lower hanging fruit to collect on”
“You can buy your Permanent Total Disability policy if your career ends, and then you can add a Loss of Value rider to cushion your loss in case you get hurt but you can still go and play,” says Chenowith. “Most athletes like the Loss of Value product in that you can have your cake and eat it too, in that you can collect your benefits and tax-free and still go play your prospective sport.”
How are these policies created?
Insurance policies are not exactly known for being simple, and these athlete disability contracts are no exception. With both PTD and LOV policies, the insurance companies underwriting the policy have to figure out what a player is likely to get on their next contract.
For pro athletes, this can mean figuring out what they’ll be offered on the free market. For college athletes, it means figuring out where they’ll be drafted.
“Loss of value coverage has something called a threshold amount,” says ReedSmith LLP attorney Richard Giller who specializes in athlete disability and loss of value coverage. “What happens is a broker or underwriters for the insurance company, or a combination of the two, try to determine the value of the athlete’s first pro contract or his or her next professional contract.”
“For college athletes, most of the drafts have slotted contract positions so it’s really kind of a determination of where they think you might be drafted. So if you’re a top ten draft pick in the NFL, you know exactly what the contract values are for those first ten picks. And so insurance companies will usually offer anywhere from 60 to 70% of that value as an insured threshold amount. If you get injured that policy year,” says Giller, “and you end up signing a contract for less than that threshold amount, theoretically the insurance is supposed to cover the difference.”
Why do these companies set a threshold at 60 to 70% instead of the full value? Well, because doing so might, shall we say, incentivize athletes to collect on the policy over trying to stay healthy and maximize their earnings.
According to Chenowith, the universities themselves are also very involved in the process, if not in the actual underwriting of the policies themselves.
“The university does play a big role,” says Chenowith. “I’ve never called a kid or a parent directly, ever, I’ve only gone through compliance officers, head coaches, assistant coaches. I’m going through the front door, and the reason why is because the school’s involvement is so great.
“If a student-athlete on campus wants disability insurance, the first person they’re going to talk to is a compliance officer. So I’m calling compliance officers and letting them know about the products we have. The school’s are actively involved in the process. They help schedule the exams with physicians to get the applications completed. And if the university is going to be using the Student Assistance Fund to pay the premiums, the compliance office is going to be involved too.”
As Giller mentioned, underwriting loss of value coverage for a college athlete is all about figuring out where they’re going to be drafted and then basing their threshold on the salary for that draft slot. And as any draft expert can tell you, figuring out a player’s draft position is no simple feat.
Here’s how one group determines draft position
Chenowith explains how he and his colleagues estimate a player’s draft slot and use that to craft a policy:
“We don’t use websites, We don’t use any of that stuff online. I think Mel Kiper does a great job, but if you look at his top 10 picks the last couple years, he’s only getting two or three right.
“Number one, we rank them by position, and we look at trends in the draft to see what positions are most valued in the draft. You notice that quarterbacks, left tackles, and cornerbacks are all really high-value positions in the draft. Offensive guard, running backs, and linebackers—those aren’t necessarily going to be the most valued picks in the draft. So we try to find the best players that are at the best positions that have the most value in the draft and then we rank them there.
“It’s a hybrid of information. It’s three things. We go off the history of the draft over the last three years. And then we rank them by position, number two. And then number three, there’s a report called The National, which most all NFL teams subscribe to. It’s a scouting service. We take that data as well, and whatever the NFL is telling us where they’re projected will help us with where we’re going to project them in the draft.
“From there, we put them in slots. If someone’s projected in the top five of the NFL draft this year’s gonna sign for anywhere between 35 million to 28 million dollars over four years. From there, what Lloyd’s of London does, is that they cut it in half. From that half-point, they assign what’s called a ‘threshold.’
“So if you’re the fifth pick, your threshold point would probably be somewhere around pick twelve to fifteen. If you have an injury that’s permanent deterioration—not permanent disability but permanent deterioration—that makes you fall past your threshold of 12, 13, 14, whatever number it is, that’s when you start collecting. So after pick 15 is where you’d be in the money.
“Depending on how far you fall—if you fall into the second, third, fourth, fifth round—wherever you fall is your stop-loss point, and that’s what your Loss of Value benefit is going to be.”
How much you get, and how much you pay, can depend on what sport you play
If you were going to take a bet on a shortstop or a running back suffering a knee injury, which one would you choose? You’d probably choose the running back, since football is a much more violent sport and the risk of injury is much higher.
These same principles hold true for PTD and LOV coverage. The cost of the policy isn’t only determined by their draft slot, but also the sport, and even the position, that they play.
And surprisingly, football is not the sport that carries the highest risk position!
“Actually, baseball amateur pitchers are the highest risk class just because amateur baseball pitchers are having Tommy John surgery left and right,” says Chenowith. “The numbers of amateur baseball pitchers having Tommy John or any kind of arm surgery are really staggering.
“If you were to rate it from the top down, for amateur sports, it would be college baseball pitchers, number one; college football, number two; college baseball position players, number three; college basketball, number four; college hockey, number five.”
The reason that LOV policies exist is to protect athletes from injuries. But just because an athlete takes out an LOV rider and then suffers an injury, that doesn’t mean that the money from that policy is just theirs to collect.
Payout isn’t guaranteed
When an athlete gets injured and drops in the draft, they still have to submit a claim in order to collect. And oftentimes, the insurer will be looking for a reason that the injury isn’t actually covered.
“This leads to one of those misunderstandings with insurance companies. If you ask a Division 1 college football player if he’s ever been injured, his answer will depend on whether he’s missed any games because of an injury. Because the vast majority of starters in Division 1 football have been hurt at some point in terms of they twisted an ankle or they rolled an ankle. But they don’t miss playing time because of it, because it’s a bump or a bruise or a minor incident for them.
“And so, on the application process for these policies, there are some questions like, ‘Have you ever been injured in the past 24 months?’ And if they don’t list every single time they might have rolled their ankle or twisted their knee that didn’t require medical attention, an insurance company might use that as an example of not being 100 percent truthful on an application. These policy applications ask questions like, ‘Have you taken any over the counter anti-inflammatory medication in the last two years?’ And for a college football player that could be, ‘Yes, daily.’ So filling out the app is a critically important step and being forthcoming as possible on that application.”
In order to avoid paying out a claim, many insurance companies will engage in what Giller has dubbed “post-claim underwriting.”
“When you underwrite a policy, you’re supposed to look into the athlete’s injury history and most of these applications demand and require a HIPAA release and most of them indicate that we’re going to look into your background to determine your eligibility for coverage. And then most of the insurance companies, in my experience, do absolutely nothing. They don’t investigate a thing,” says Giller.
“An athlete may list several knee sprains or a shoulder subluxation or something that’s fairly common for the sport and the insurance companies make no effort to investigate. And then when a claim comes up they ask for every medical record for past ten years, and when they find an MRI that has something on it that could be interpreted as a bigger strain in the shoulder or knee than was first reported, they believe that they have grounds to potentially deny coverage.”
Lots of people have stories about fighting to get their insurance policies honored after filing a claim. In that sense, these elite athletes aren’t so different from the rest of us after all.
Eric Chenowith is an insurance producer at Parq Advisors, where he joined following eight years as a professional basketball player and an additional three years of coaching and teaching at his alma mater, Villa Park High School. Eric works directly with university athletic directors at most all College Football Playoff (CFP) institutions for their student-athlete disability insurance needs. Currently, Eric is a member of the Board Development Task Force at the Orange County Ronald McDonald House in Orange, California. He has also been featured sports topics on The Russillo and Kanell Show along with Outside The Lines with Bob Ley. Eric also served as a featured guest on NBATV with Rick Kamla.
Richard Giller is partner in the Los Angeles Office of ReedSmith LLP (@reedsmithllp). He is one of a handful of attorneys in the country who represents collegiate and professional athletes (and counsels professional sports teams) regarding their disability, loss-of-value and workers’ compensation insurance claims. He was recently recognized by the Los Angeles Business Journal as one of five finalists for the 2017 Entertainment and Sports Law Attorney of the Year award.