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When risk executives of Major League Baseball have to decide how much disability coverage a player is worth, they act as umpires, of sorts, for senior management. Here are two examples underlining the differences between choosing a strategy of disability coverage and one of self-insurance.

TEAM A: ELECTS DISABILITY COVERAGE

As a condition of the contract, the team requires the player to pass the insurance examinations that allow the team to procure a disability policy that covers 75 percent of the team's contractual obligation. The disability policy contains a half-season waiting period.

During his first spring training with Team A, the pitcher injures his throwing elbow and is expected to miss at least a full season following surgery. Doctors predict the pitcher could miss as much as a season and a half before he is ready to return to the roster.

Assuming the player misses a season and a half, Team A would collect a total of $7.5 million for the period of time missed, making the net loss to the team $7.5 million. If the player's injury turns out to be permanent, the team would collect a total of $18.5 million and their net loss only would increase to $11.5 million.

TEAM B: ELECTS TO SELF-INSURE

Team B takes a very different tack, the one used by the Seattle Mariners. In this case, Team B signs the other top free agent pitcher on the market to an identical three-year, $30 million contract at $10 million per season, but management decides to self-insure and declines an option for disability insurance.

That spring training the second pitcher injures his throwing elbow and is expect to miss at least 18 months following surgery to repair the injury.

Assuming the player misses a full season and a half, Team B stands to lose $15 million. If the player's injury turns out to be permanent, the team will lose the full $30 million, versus only $11.5 million in the first example.

October 15, 2006

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