Richard Giller, a Partner with Reed Smith, has spent more than 30 years crafting litigation strategies for complex insurance and commercial disputes. A fierce advocate for policyholders, Giller has agreed to join us for a two-part interview series in order to provide insight into the topic of loss-of-value insurance.
Can you generally describe what loss-of-value insurance covers and how it works?
Let me start by saying that for several years, I have been and continue to be a consistent and outspoken proponent of having every student-athlete who is projected to be a top NFL, NBA, MLB or NHL draft pick purchase appropriate insurance coverages to protect against the potential adverse impact a serious injury suffered during the final collegiate season might have on their future earnings.
Towards that end, the best protection comes in the form of a permanent total disability (PTD) insurance policy with a loss-of-value (LOV) insurance rider. Because insurance policy language can often be arcane and archaic a primer on PTD and LOV insurance is in order.
First, there is no such thing as a stand-alone LOV insurance policy. Instead, loss-of-value coverage is only available as an add-on (known as a “rider”) to a PTD policy and those combined policies usually provide one year of insurance coverage, subject to an annual renewal.
The difference between the two types of coverages lies in the extent and temporal nature of the injury causing loss. PTD coverage provides a policyholder with a present value, lump sum payment, if it is determined that the insured athlete will never be able to participate in his or her sport at the professional level because of an injury sustained in college or, for professional athletes, if such an injury ends the athlete’s professional career.
In contrast, LOV coverage insures the difference between the anticipated value of the athlete’s first contract (for college players) or his/her next contract (for professional athletes), and the reduced value of the contract the athlete actually signs following a material injury that occurred during the policy period. Loss-of-value coverage kicks in when the injury was the sole and direct cause of the drop in contract value.
For illustration purposes only, a common insuring agreement for loss-of-value coverage might read something like, the insurer will indemnify the athlete “for his Aggregate Ascertained Net Loss, up to, but not exceeding the Limit of Indemnity [e.g., usually between $1 and $5 million] should the Insured fail to receive an Offer from a Professional [Sports] Team that totals $15 million or more in Compensation, solely and directly as a result of Injury or Illness occurring during the period of this Insurance.”
As a general rule, insurance companies issuing an LOV rider will agree to insure 60% of the value of the athlete’s anticipated first or next contract. The insured amount is referred to as the “threshold” amount. So, for example, if the anticipated value of a player’s first contract is $20 million, the insurance company will set the threshold at $12 million. Under that scenario, if the insured athlete signs a $10 million contract instead of a $20 million because he suffered a serious injury, then the insured “loss-of-value” claim would be $2 million (assuming the limits of coverage were $2 million or more).
Determining the proper threshold amount is a critically important step in the procurement process when obtaining a PTD/LOV policy and that determination is one that is usually undertaken by the wholesale insurance broker/coverholder (discussed below) in concert with underwriters working for the various insurance markets or insurance companies.
Before purchasing a PTD/LOV policy, there are a couple of other important background facts about which the student-athlete and his or her school or, for professional athletes, their agents or financial advisors, should be aware.
First, the policy limits for LOV coverage cannot exceed the policy limits for the PTD coverage. In other words, if an athlete purchases $5 million in PTD coverage, the maximum amount of LOV coverage he/she can purchase is also $5 million. In many instances, the LOV limits are lower than the PTD limits.
Second, the policy limits for the two types of coverage (PTD and LOV) are also mutually exclusive which means that an insured athlete can only claim recovery under either the PTD or the LOV coverage, depending on the severity of the injury. An insured athlete cannot recover both policy limits. For example, if an injured athlete has $1 million in PTD coverage and another $500,000 in LOV coverage, they can receive either a $1 million payout if they are unable to play professionally because of that injury or they can recover up to $500,000 if they receive an offer from a professional team which is $500,000 less than the insured contract amount but the athlete is not entitled to recover both limits.
As you can tell from my prior answers, PTD/LOV insurance coverage is not exclusively purchased by college athletes. In fact, many professional athletes purchase this type of coverages the year preceding an anticipated jump in the value of their next contract. For example, a major league baseball (MLB) player might purchase a PTD/LOV policy before each year he is salary arbitration eligible and again before he becomes a free agent. NBA, NFL and NHL players often purchase LOV coverage prior to becoming both a restricted or an unrestricted free agent.
Could you lead us through the process of how a college athlete acquires a loss-of-value insurance policy? Does the player request it from the school?
The majority of PTD/LOV policies issued to athletes are written by members of the insurance market commonly known as Lloyd’s of London. Contrary to what some people think, Lloyd’s is not an insurance company but, instead, it is an insurance marketplace where members can join together as syndicates to insure certain risks. A Lloyd’s syndicate provides capital to insure certain risks and it acts as an intermediary between the policyholder (the insured athlete in PTD/LOV policies) and the underwriters, brokers, and insurance companies. In addition to the Lloyd’s market, a handful of other insurance companies also offer PTD/LOV coverage such as North American Capacity Insurance Company, a part of the Swiss Reinsurance group of insurance companies and Houston Casualty Company, a member of the Tokio Marine group of companies.
Because of the unique nature of the Lloyd’s insurance market, individual athletes and their respective colleges and universities, as well as sports agents and financial advisors for professional athletes, are prohibited from dealing directly with Lloyd’s. In other words, the persons or entities paying the policy premiums cannot go online or pick up the phone and ask for a quote or submit a policy application like they might be able to do with other types of insurance products.
Instead, there are several Lloyd’s wholesale insurance brokers that serve as “coverholders” which is a term of art defined by Lloyd’s as a company authorized by a Lloyd’s managing agent to enter into a contract or contracts of insurance to be underwritten by the members of a Lloyd’s syndicate managed by Lloyd’s in accordance with the terms of a binding authority and who are authorized to deal directly with Lloyd’s. If an entity is an approved Lloyd’s coverholder, they will generally have the authority to act on behalf of Lloyd’s in placing and binding PTD/LOV insurance coverage.
As a general proposition, coverholders usually have no direct contact with the athletes or with their colleges or universities or, in the case of professional athletes, with sports agents or financial advisors; all of that is done through retail brokers who are also known as producing agents.
In other words, a wholesale broker/coverholder acts as an intermediary between insurers and retail brokers/producing agents whereas the retail broker/producing agent acts as an intermediary between the student or professional athlete or their colleges, universities or representatives, and the insurance marketplace. As you might imagine, the questions set out on PTD/LOV policy applications, as well as the wording of the insurance policies themselves can vary greatly between the various wholesale brokers and coverholders and understanding those differences can be of critical importance.
In my experience, it is not only the application and policy wording that can vary depending on the PTD/LOV coverholder involved but, as with any type of business, the integrity and reputation of the involved entities, the thoroughness of their threshold analysis and research, and the care, responsiveness and the transparency of their communications can also vary significantly depending on the individual wholesale broker/coverholder.
The process of how a college athlete acquires a PTD/LOV policy can take a number of different forms. Some college athletic departments and/or their compliance offices are familiar with these types of policies and have existing relationships with particular brokers they know and trust. In that situation, the school might reach out to the broker to discuss obtaining quotes for those student-athletes who might be eligible for PTD/LOV insurance coverage. Similarly, a player or their family might raise the issue with the coaching staff or a member of the athletic department who, in turn, might reach out to a retail broker.
The process could also be initiated from outside the college or university. For example, a retail broker might identify a player or players who could be potential first, second or third round picks in their respective sports and that broker might contact the coaches and athletic directors letting them know of the student-athlete’s potential future earnings.
Once granted permission from a school to explore coverage, the retail broker will go to the insurance market to obtain quotes for coverage and present the various options to the school and the student-athlete. Whether a particular school agrees to pay the policy premiums out of Student Assistance Fund money provided to them by the NCAA is strictly within that school’s sole discretion and whether the student-athlete wants or needs that assistance. Some schools have specific policies, such as only paying the insurance policy premiums for seniors but not for underclassmen.
Finally, some student-athletes themselves might initiate the conversation with a coach, sports information director or his/her school’s athletic department.
What is the average cost of a loss-of-value insurance policy for a college athlete?
The average premium cost for each million dollars’ worth of PTD and LOV coverage varies slightly by sport but it essentially breaks down this way: (a) for college football players, the average premium cost is $7,000 per million for PTD and $4,000 per million for loss-of-value coverage depending on the time of year when coverage is bound; i.e., the earlier in the year, the more expensive the premium because the athlete is insured during pre-season periods as well as in-season; and (b) for college basketball the average premium cost is $4,000 per million for PTD and $3,000 per million for LOV coverage.
Thus, a $10 million insurance policy for a college football player, consisting of $5 million in PTD limits and an additional $5 million in loss-of-value coverage, would run approximately $55,000 and a college hoopster would pay about $35,000 in premiums for the same coverage.