Baseball Musings
Baseball Musings
March 27, 2006
No Insurance for Bagwell

It looks like the Houston Astros will be without Jeff Bagwell and an insurance check:

The Astros have been told they cannot collect on the insurance policy they hold on disabled first baseman Jeff Bagwell's $17 million salary for this year, an attorney for Connecticut General Life Insurance has confirmed.

"On March 13, 2006, Connecticut General Life Insurance Company notified the Houston Astros that it had denied a total disability claim submitted by the Astros relating to Jeff Bagwell," said attorney Ty Buthod, a partner at the Houston law firm of Baker Botts. "The company determined that there had been no adverse change in Mr. Bagwell's condition or ability to play baseball between the end of last season, when he was an active member of the roster, and January 31, 2006, the date the policy expired. The company carefully reviewed the claim as submitted by the Astros and determined that the claim did not support a finding of total disability."

It seems that since Bagwell was able to pinch hit at the end of last season, and the insurance company didn't see anything that would hurt his ability to pinch hit over the winter, he's not "totally" disabled.

The Astros are likely to take this to court. My guess is that the two sides settle at a later date for something less than $15 million, especially once Bagwell retires.

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Posted by David Pinto at 09:07 PM | Injuries | TrackBack (0)
Comments

It strikes me as extremely odd that baseball teams take out insurance policies on their players. Insurance reduces expected value and reduces risk/variance. Insurance costs money. That money could be used to attract and retain better players. In fact, in expectation, its more expensive to take out the insurance than not (otherwise all insurance companies would go bankrupt!). So, by taking out insurance policies on your players, you're making your team worse in expectation. Insurance also reduces variability---it means there's less chance you'll finish last, but also less chance of winning the World Series. If I owned a baseball team, I'd much rather alternate between first and last every year, rather than finish in the middle of the pack every year. Seems that you draw the most fans by increasing the chance that you'll finish first, not by reducing the chance that you'll finish dead last.

Posted by: Jason at March 27, 2006 09:26 PM

Well, the 'Stros hold only one other policy--on Berkman.

Posted by: D. at March 27, 2006 10:09 PM

I think it's mostly for very expensive players, and when it comes into play, it's usually for guys like Belle, who was owed something like 50 million bucks and barely cost the o's anything when he retired suddenly. Of course, there was no controversy with Albert's retirement/disability. I bet the O's are very glad they bought that insurance policy. I bet the Yankees have one on A-Rod and Randy, at the very least.

Posted by: david at March 27, 2006 10:30 PM

"Insurance reduces expected value and reduces risk/variance."

Right on both counts... I can think of a few reasons teams might do this (besides the reducing risk/variance, which is essentially reason enough for most cases). If Bagwell was due $18 million, and the Astros bought a policy for $1 million, and there was a 1 in 20 chance of him getting hurt, the insurance company wins in expected value. Fine. But if Bagwell as a player is worth $18 million, plus the $1 million for insurance, if he plays, then the Astros are getting a deal. Either he plays and is worth the money, or he doesn't play and they get the money back.

The other thing I can think of is in terms of Wins. Someone did an analysis on how much a win is "worth" to teams in bringing in revenue... I believe the result is that wins beyond some point (a bit above .500 I'd guess) are not as valuable as wins that get you to .500. As an above-.500 team, the Astros are getting less and less value out of each additional win. So even though the insurance causes a loss in expected value in dollars of salary or units of talent, it lessens variance such that the Astros keep the "more valuable" wins and only lose the less valuable bonus wins (like wins beyond what's needed for a .500 finish, or a playoff spot).

In essence, the first million you spend in salary gets you a lot more than the thirtieth, which gets you a lot more than the 150th. So that's why insurance policies might be essentially positive transactions for teams, even though as you point out the teams are losing EV in immediate dollars.

Posted by: Mike at March 28, 2006 12:43 AM

Teams get insurance is because the banks that loan them money insist upon it.

Posted by: Mac at March 28, 2006 12:25 PM
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