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Loss-of-Value Insurance White Paper

Insurance Products to Protect Future Earnings

An NCAA resource for members, parents and student-athletes

Do college athletes have disability insurance options to protect their potential future earnings as a professional athlete?  What if the player suffers an injury/illness that is not career ending but significantly decreases the athlete’s value? What is the eligibility for coverage?

This report is designed to explain what disability coverage options may be available for student-athletes and how they work.  This report will also touch on the current state of the disability insurance marketplace as well as highlight important items that college athletes should be aware of if they decide to pursue disability insurance.

What is permanent total disability coverage?

Permanent total disability (PTD) coverage for a student-athlete protects a player who suffers an injury or illness during the designated coverage period which prevents the player from ever competing as a professional athlete (i.e., must be a career-ending injury or illness).

Permanent total disability coverage is 24-hour accident and sickness coverage, including the playing and practicing of the player’s sport. The benefit amount (payable in a lump sum) and pricing is determined by insurance underwriters based on the sport, projected draft position and injury history. The medical underwriting process includes an application and physical exam, and exclusions for specific pre-existing injuries or illnesses may apply. The waiting period is 12 consecutive months from the date permanent total disability is determined before benefits are payable.

Does the NCAA offer any disability coverage option to student-athletes?

Yes, coverage through the Exceptional Student-Athlete Disability Insurance (ESDI) Program is available to qualifying college athletes. Student-athletes in football, men’s basketball, baseball, men’s ice hockey and women’s basketball can apply for the coverage. If the student-athlete is approved by the program administrator, he or she will be able to purchase permanent total disability coverage with pre-approved financing, if necessary.

Eligibility

Student-athletes with remaining eligibility and who are projected to be selected in the designated rounds of the following professional sports drafts are eligible for the Exceptional Student-Athlete Disability Program: football and men’s ice hockey in the first two rounds; men’s basketball, baseball and women’s basketball in the first round.

Benefit

The program administrator determines the benefit amount based on the player’s sport and projected draft position up to the following maximums:

Football $10,000,000
Men’s basketball $10,000,000
Baseball $5,000,000
Men’s ice hockey $3,000,000
Women’s basketball $250,000

What is loss-of-value coverage?

Loss-of-value (LOV) coverage for student-athletes protects the player’s future contract value from decreasing below a predetermined threshold amount from a significant injury or illness suffered during the designated coverage period.  Insurers typically mandate that loss-of-value coverage must be purchased in conjunction with permanent total disability coverage and is typically purchased for the year prior to the year in which the player becomes draft-eligible.

Similar to permanent total disability coverage, loss-of-value is 24-hour coverage and medical underwriting is required. Exclusions for specific pre-existing injuries or illnesses may apply.

How does loss-of-value coverage work?

Step 1 – determine eligibility

The insurance underwriters will determine eligibility for loss-of-value coverage based on the athlete’s projected draft position.  Note that this information may vary significantly among each insurance provider.  If the player is projected to be selected early enough in the draft to be eligible, the insurance underwriters may offer a loss-of-value coverage limit typically between $1 million and $10 million based on the projected draft position.

Step 2 – set threshold

The insurance underwriters will set a loss-of-value threshold. The threshold is a specific draft selection, and therefore a specifically established contract value, in which the athlete must fall below in the draft due to an injury or illness occurring within the policy period.  The insured athlete must sign a contract for an amount less than the threshold in order to trigger LOV policy benefits.  There is no set standard for LOV policy thresholds as insurers establish this amount based on their unique underwriting evaluation and overall company risk tolerance.  LOV policy thresholds can range from an amount below the contract value of the last pick in the draft, to upwards of 60% of the athlete’s projected rookie contract.  In rare cases, the threshold could exceed 60%.  It is also important to review policy thresholds closely as some coverage offers may include thresholds that are so low that no payout could mathematically be triggered.  Some insurance underwriters will break down the threshold into an average amount per year to determine the loss-of-value benefit when the maximum contract offered is a different length from the projected rookie contract. This could result in different claim payment amounts depending on carrier and underwriter.

Example:

The player’s projected rookie contract is four years, $10 million total

  • Projected rookie contract x 60 percent = Loss-of-value threshold
  • $10 million x 60 percent = $6 million loss-of-value threshold
  • $6 million / four years = $1.5 million annual loss-of-value threshold
Step 3 – determine benefit

If the maximum contract offer the player receives is less than the threshold amount solely and directly as a result of a significant injury or illness, the player could be eligible for a loss-of- value benefit based on the difference up to the coverage limit.

Example:

  • Player’s projected rookie contract is four years, $10 million total
  • Player’s loss-of-value threshold is four years, $6 million total
  • Player is offered a rookie contract of four years, $5 million total
LoV threshold Contract offer LoV benefit
$6 million - $5 million = $1 million

However, if the maximum contract offer amount exceeds the threshold amount, the player is not eligible for a loss-of-value benefit.

Example:

  • Player’s projected rookie contract is four years, $10 million total
  • Player’s loss-of-value threshold is four years, $6 million total
  • Player offered a rookie contract of four years, $7 million total
LoV threshold Contract offer LoV benefit
$6 million < $7 million = None payable

Loss-of-value case studies

The following case studies provide a more in-depth look of how different scenarios will affect a potential loss-of-value claim.  All of the football athlete examples and the first basketball player example assume that all contracts are four years.  The basketball examples to follow will expand on what was mentioned earlier in the report about how some underwriters will use an annual threshold amount when the actual contract offer is a different length from the projected rookie contract and how different payment methods will affect the benefit received.

Football player case studies – Player A
  • Player A is projected to be the first pick by one of the insurance providers in the NFL draft
    • Based on the 2014 NFL rookie scale, the first pick would make $22,272,998 over his four-year rookie contract
    • Loss-of-value threshold is set at 60 percent of the $22,272,998, which is $13,363,798
    • The insurance underwriter offers the player a loss-of-value coverage limit of $10 million
  • Due to a significant injury, Player A falls in the NFL draft

In order for Player A to have a potential loss-of-value claim, he will need to fall to the eighth pick or lower before his contract amount will be less than his threshold amount of $13,363,798.

Player A falls to the seventh pick in the NFL draft

If Player A falls to the seventh pick in the NFL draft, his actual contract according to the rookie scale will be $14,631,500, which is greater than the $13,363,798 threshold in his loss-of-value policy. In this scenario, Player A will not have any payable loss of value benefits even if the player has met the policy criteria, definitions and benefit triggers qualifying for benefits.

  • Projected contract = $22,272,998
  • Loss-of-value threshold (60 percent of projected contract) = $13,363,798
  • Loss-of-value coverage limit = $10 million
  • Actual contract offer = $14,631,500
LoV threshold Contract offer LoV benefit
$13,363,798 < $14,631,500 = None payable
Player A falls to the 10th pick in the NFL draft

Should Player A fall to the 10th pick in the NFL draft, his actual contract according to the rookie scale will be $12,249,146, which is less than the $13,363,798 threshold.  In the event he qualifies as a claim, the underwriter will take the difference between the threshold and actual contract, and a loss-of-value benefit of $1,114,652 would be payable to Player A.

  • Projected contract = $22,272,998
  • Loss-of-value threshold (60 percent of projected contract) = $13,363,798
  • Loss-of-value coverage limit = $10,000,000
  • Actual contract offer = $12,249,146
LoV threshold Contract offer LoV benefit
$13,363,798 < $12,249,146 = $1,114,652
Player A falls to the 74th pick in the NFL draft

In this scenario, Player A falls to the 74th pick in the NFL draft, so his actual contract according to the rookie scale will be $2,963,876, much less than the $13,363,798 threshold.  The difference between the threshold and actual contract equals $10,399,922, which is greater than the loss-of-value coverage limit of $10,000,000. In the event he qualifies as a claim, Player A will receive the maximum benefit of $10,000,000.

  • Projected contract - $22,272,998
  • Loss-of-value threshold – 60 percent of projected contract - $13,363,798
  • Loss-of-value coverage limit - $10,000,000
  • Actual contract offer - $2,963,876
LoV threshold Contract offer LoV benefit
$13,363,798 < $2,963,876 = $10 million (max policy benefit)
Basketball player case studies – Player B
  • Player B is projected to be the 10th pick in the NBA draft
    • Based on the 2014 NBA rookie scale, the 10th pick would make $10,849,500 over his four-year rookie contract
  • Loss-of-value threshold is 60 percent of the $10,849,500, which is $6,509,700
    • The insurance underwriter offers Player B a loss-of-value coverage limit of $3 million
  • Due to a significant injury, Player B falls in the NBA draft

In order for Player B to have a potential loss-of-value claim, Player B will need to fall to the 23rd pick or lower before his contract amount will be less than his threshold amount of $6,509,700.

Player B falls to the 30th pick in the NBA draft

If Player B falls to the 30th pick in the NBA draft, his actual contract according to the rookie scale will be $5,580,344, which is less than the $6,509,700 threshold in his loss-of-value policy.  In the event he qualifies as a claim, the underwriters will take the difference between the threshold and actual contract, and a loss-of-value benefit of $929,356 would be payable to Player B.

  • Projected contract - $10,849,500
  • Loss-of-value threshold – 60 percent of projected contract - $6,509,700
  • Loss-of-value coverage limit - $3 million
  • Actual contract offer - $5,580,344
LoV threshold Contract offer LoV benefit
$6,509,700 < $5,580,344 = $929,356
What happens when the contract offer is a different length  from the threshold?

“One-and-done” and “payback” claim payment methods

When the maximum contract offered is not the same length as the four-year projected rookie contract, underwriters will handle the payment of benefits differently.

In the one-and-done method, the underwriters will use only the first contract, regardless of its length, to determine benefits. They will break down the threshold into an average-per-year amount in order to determine the loss-of-value benefit, which is often referred to as a “pro-rata offer.”  If the average annual salary amount is less than the average annual threshold amount, benefits can be payable. However, if the average annual salary is greater than the average annual threshold, no benefits are payable, even though the total contract amount may be less than the total four-year threshold amount.

In the “payback” method, the underwriters do not annualize the threshold. In this method, the underwriters will look only at the total contract amount compared to the total threshold amount when determining if benefits are payable. However, after benefits are paid, the underwriters will continue to monitor the claim over the four-year period the threshold was based on to see how much the player ends up receiving over those four years. In the event the total salary over the four years, plus the loss-of-value benefit received, exceeds the loss-of-value threshold, the player will need to repay benefits.

Player B is not selected in the NBA draft and is offered a two-year professional basketball contract overseas
  • Projected contract - Four years, $10,849,500
  • Loss-of-value threshold (60 percent of projected contract) - four years, $6,509,700
  • Annual loss-of-value threshold ($6,509,700 / four years) = $1,627,425
  • Loss-of-value coverage limit - $3 million
  • Actual contract offer - two years, $1 million

“One-and-done” claim payment method

If the underwriters are using the “one-and-done” method, they will break the threshold down to an annual amount of $1,627,425. Since the player received a two-year actual contract, they will multiply the annual threshold by two in order to get a two-year threshold amount. In the event he qualifies as a claim, the underwriters will take the difference between the two-year threshold and the two-year actual contract to determine that $2,254,850 would be payable to Player B. Regardless whether Player B signs another professional basketball contract, he will be able to keep the $2,254,850.

LoV threshold Contract offer LoV benefit
$6,509,700 < $5,580,344 = $929,356

“Payback” claim payment method

If we use the same set of circumstances detailed above, but now the underwriters are using the payback method, the result would be different. With the payback method, the underwriters will take the difference between the total four-year threshold amount and the total two-year actual contract amount. Since the difference between the total threshold and total actual contract is greater than the loss-of-value coverage limit, the underwriters will pay Player B the full $3,000,000.

LoV threshold Contract offer LoV benefit
$6,509,700 < $5,580,344 = $929,356

However, after the two-year contract expires, Player B signs a new two-year contract worth a total of $8 million, meaning the total salary received over four years is $9 million.  Player B already received the $3 million loss-of-value benefit.  Therefore, when you add that amount to his salary, Player B has received a total of $12 million over the four-year period. The underwriters will take that $12 million amount and subtract the four-year threshold amount to determine if benefits need to be repaid.  In this example, Player B received $5,409,300 more than the threshold amount, so player B must repay the full $3 million.

Total contract over four years + LoV benefit paid LoV threshold Amount received over LoV threshold
$12 million - $6,509,700 = $5,409,300

Loss-of-value important coverage terms and conditions

The important thing to remember is that having a loss-of-value policy, suffering an injury or illness and then falling in the draft does not guarantee a claim is payable. Proving an injury or illness is solely and directly the reason for the decrease in the athlete’s value may be difficult. For this reason, insurance providers include additional benefit triggers which must be satisfied in order for claim eligibility. Some of the factors that may cause a decrease in value that are not covered include:

  • Off-field issues
  • Poor performance during the season
  • Poor performance at a draft combine
  • Player was surpassed in the draft due to another athlete’s superior performance
    • Professional team’s needs changed (i.e., team made a trade before the draft and no longer covets a quarterback with its first-round pick)

The policy wording even has an exclusion that applies for the athlete not receiving an offer from a professional team that totals the threshold amount or more of compensation for any reason other than due to injury or illness as defined.

It is also extremely important to read the definitions and exclusions very carefully.  Below are general examples of the definition for injury and illness, along with standard policy exclusions found in a loss-of-value policy, which will typically vary.

Definitions

Injury: Bodily injury sustained by the insured athlete during the period of this insurance which requires medical treatment by a physician and has negatively affected the insured athlete’s skills in a manner that causes substantial and material deterioration in his ability to perform in his occupation.

Illness: Illness first manifested in the insured athlete during the period of this insurance which requires medical treatment by a physician and has negatively affected the athlete’s skills in a manner that causes substantial and material deterioration in his ability to perform in his occupation.

Standard policy exclusions

  • Pre-existing injuries and illnesses
  • Osteoarthritis, cumulative injury or degenerative joint disease
  • Drugs or alcohol
  • Criminal act
  • Suicide or intentional self-injury
  • Mental, nervous or psychological disease or disorder
  • Act of war
  • Act of nuclear, chemical or biological terrorism

Loss-of-value marketplace

Lloyd’s of London writes the majority of loss-of-value policies on student-athletes. There are multiple Lloyd’s wholesalers offering a loss-of-value product, but the policy wording and scope of players they are willing to offer coverage on can vary significantly.

Some of these Lloyd’s wholesalers include:

  • International Specialty Insurance
  • Exceptional Risk Advisors
  • Tokio Marine HCC Specialty Group (outside of the NCAA ESDI Program)

The Lloyd’s loss-of-value marketplace has a very limited claims history. The flood of student-athletes currently seeking loss-of-value coverage and pending Lloyd’s lawsuits for denied claims will impact this tenuous marketplace.  In recent years, the cost of LOV policies have significantly increased, while benefit offers amounts have been dramatically reduced.  In addition, the actual number of student-athletes qualifying for LOV coverage has also significantly reduced in recent years.

The administrator of the Exceptional Student-Athlete Insurance Program (Tokio Marine HCC Specialty Group) also offers a loss-of-value product.  The company has written LOV policies since the product’s inception in the 1990s. However, they are highly selective in deciding whom to offer loss-of-value coverage for collegiate student-athletes.  Neither the NCAA program nor Tokio Marine HCC Specialty Group have any current or pending lawsuits as it relates to PTD insurance policies procured through the NCAA Exceptional Student-Athlete Disability Insurance Program.

The annual premium estimate for $1 million of loss-of-value and permanent total disability coverage ranges between $10,000 and $30,000. The premium rates may vary by sport, with the rate for coverage on a football player being higher than a basketball player.  Rates are subject to change and could be significantly higher depending on the individual.

Effective practices

Always be sure that you know what coverage you are buying. Get multiple quotes and offers from multiple brokers/insurance agents and insurers. Make sure that you understand the terms and conditions of the policy before purchasing anything.  Don’t be afraid to ask a lot of questions and ask if some exclusions can be removed or definitions can be reworded. Review the exclusions and make sure the following exclusions are removed when underwriting is completed. Exact wording will vary based on the different contract wording and offers.  While some subjectivities may be removed at policy issuance, there may be reasons for adding exclusions at the discretion of the underwriters.

  • Coverage will exclude any claims arising from injury and/or sickness to any part of the body for which the insured person has been recommended and/or given any medical treatment by a qualified physician during the 18-month period before the effective date of coverage.
  • Coverage will exclude any claims arising from osteoarthritis, cumulative injury or any other degenerative process of the joints, bones, tendons or ligaments.

During the underwriting process, the applicant should be as thorough as possible on the application. It is best to err on the side of being over-inclusive when disclosing a college athlete’s medical history. A potential claim could be denied due to the student-athlete omitting information from the application, even if the omitted item has nothing to do with the injury or illness suffered.  Be sure that the college athlete is directly involved in the entire application process. The application must be signed by the student-athlete applying for coverage; however, they should not be signing a blank application to be completed by a parent, coach, athletic trainer, etc. The student-athlete should be involved in providing the answers to the application questions. Please also note that unlicensed insurance agents/representatives, by law, are unable to provide insurance advice or sell coverage to an applicant.

This report is intended for informational purposes only and should not be used as a solicitation or an offer to buy insurance.