Marqise Lee (right, shown playing for USC in 2012) has sued Lloyd's of London over loss-of-value insurance.
Photo by Jerry Ting/Neon Tommy.
This week, some of the best young football players in the country took the field in the College Football Playoff National Championship. The game’s stars will doubtless expect generous compensation as top picks in the NFL Draft in April.
Yet a serious injury can wildly change the shape of a young athlete’s career. Of course, a serious injury can reshape any young adult’s career prospects; that is why disability insurance exists. But for those who expect to earn a substantial living by performing at the highest peak of athletic ability, the distance between expectations and the reality of a serious injury can have an outsize impact.
Total permanent disability insurance was, and is, a safety net for players who are hurt so badly they cannot ever play professional football. It is a worthwhile investment for any player who expects to go pro, designed to cover a real risk of college play. But as of the past few years, a new insurance product claims to protect players from a different risk: a scenario in which they can still become professional athletes, but an injury reduces their value to potential future employers.
The difference between the contract offered to top-tier NFL draft picks and other rookies is substantial. In the 2016 draft, the top six rookie draft picks were all offered contracts topping $20 million. Because of the league’s Rookie Compensation Pool, compensation drops sharply outside the top tier. The 32 NFL clubs split a pool – $1 billion last year – in proportion to the number and position of their draft picks. Draftees in rounds three through seven not only get smaller starting offers, but tend not to have a fifth-year option written into their contracts.
These economic realities underpin loss-of-value insurance. Loss-of-value coverage, which cannot be obtained without permanent disability coverage, is designed to make up the difference if a player is knocked from, say, a first-round draft pick to a fifth-rounder due to an injury. The idea is that benefit payouts would offset the loss of earning potential represented by the on-field (or on-court or on-ice) injury.
In theory, this sounds great. But as with all insurance products, the real value – or lack thereof – comes down to the details.
Loss-of-value insurance is only available to student athletes who are projected to be within a certain tier of their sport’s professional draft. For eligible athletes, the insurance underwriter estimates a potential rookie contract as a baseline. Then, in theory, if a significant injury or illness causes the player to receive an offer substantially less than that projection, the policy pays out a loss-of-value benefit.
The problem is that, in the product’s short history, that theory has very seldom been put into practice. As of this writing, only two athletes have received a payout: Silas Redd of USC and Ifo Ekpre-Olomu of Oregon. An observer might hope this is because serious injuries are relatively rare, but this is not the full story; Lloyd’s of London, one of the main loss-of-value policy underwriters, faces several lawsuits for refusing to pay claims that players claim are legitimately covered.
As the NCAA pointed out in a white paper it issued on loss-of-value insurance, proving that an injury is directly to blame for falling in the draft standings is often difficult. For example, other factors in draft desirability, such as poor performance during the season or another player’s improved performance in the same period, are not covered. Many policies also have exclusions for “off-field issues,” which could theoretically cover a wide range of scenarios, and for mental disorders, an especially pressing concern for football players considering the ongoing concerns about the effects of repeated concussions and chronic traumatic encephalopathy.
In addition to concerns about benefit payouts, there is some controversy over who pays the premiums for these policies and how. The NCAA does not provide loss-of-value coverage, unlike permanent total disability, due to the organization’s concerns about the product. However, the NCAA does allow players to take out bank loans against their future earnings in order to cover the hefty loss-of-value premiums. If students take such loans and if the policy pays out – two big hypotheticals, at this point in the product’s history – any received benefits would be tax-free.
Of more immediate concern, though, is the fact that some major college programs have decided to use loss-of-value coverage as a recruiting tool for top players. According to the Los Angeles Times, Ohio State paid for five such policies in 2016, and Florida State and Oregon have also offered them in the past. The problem is that some schools are paying these premiums from a student assistance fund, designed to cover small emergencies for student athletes of all levels, the rank-and-file as well as the stars. Yet loss-of-value premiums, which can range from $18,000 to $25,000 annually, may eat up as much as 20 percent of that fund per player. As you would expect, schools are using the offer to cover the premiums as both a recruiting tool and an enticement to get star players to return to school to play another year instead of heading to the pros, but in many cases they are reducing their ability to help other athletes who, for instance, suffer a death in the family.
Some schools’ compliance directors are also leery of offering loss-of-value coverage because their payout history has been so uneven. Dave Roberts of USC has cited the possibility of legal liability if a school sells an athlete on loss-of-value coverage and the underwriter fails to pay out.
Critics claim that student athletes are frequently exploited due to lack of regulation and outsize commissions for such policies. Bryan Fisher, a personal injury attorney who sees himself as a reformer in the area of student athlete insurance, contends that many schools mislead their players, either out of ignorance or haste. He also pointed out, in speaking with CBS Sports, that when insurers deny an athlete’s claim, fighting back will cost money, potentially making the situation even worse in the short term.
What’s a student athlete to do? If I were a young athlete and my school offered to pay the premiums on a loss-of-value policy, it is hard to imagine myself refusing. If the choice was to take out a loan against my future earnings, the decision might become more complicated. But the risk of injury ending a career or causing you to drop in the draft before you can even make it to the big show is real; that is why, in fact, many student athletes leave school early to minimize that very risk.
If you choose to pursue loss-of-value insurance, it is especially important to perform proper due diligence:
- Consult with someone who has no financial stake in your decision but the expertise to read complicated policy documents, such as a Certified Financial Planner™, to help sort through the policy’s specifics, especially its exclusions.
- Gather quotes from multiple underwriters.
- Carefully review all the terms and conditions of the policy, and ask for clarification if you need it.
- Ask if certain exclusions can be made more specific, reworded or removed entirely.
- If you decide to apply, be as thorough as possible in disclosing medical history.
- Never sign a blank application for a parent or coach to complete later. Be sure you fully review anything you plan to sign.
Insurance policies are confusing to laypeople for a reason. But for student athletes considering professional careers, establishing the habit of reading legal documents carefully, asking questions and acting as their own advocates will serve them well in their future endeavors.
Loss-of-value policies could potentially meet a real need but have yet to prove their value. As with any insurance, players should hope they never need to collect, but they should also take care to get a policy with the best chance of actually paying out should a blown knee put a damper on their future earning power.