Insuring Major League Baseball player contracts is big business.

The MLB spends in excess of $55 million in annual premiums to obtain individual player contract protection policies and the premiums charged for these policies are not cheap.

Rates run as high as 10 percent of the annual value of the player’s contract to secure coverage for between 50 percent and 80 percent of the total contract value.

Most player contract policies today are written for three years and provide coverage at a 70 percent level, which means that a team may only be able to secure $70 million of insurance coverage for a $100 million contract.

That threshold varies, depending on the size of the total contract as well. For example, a $200 million contract might be insured at a level below 50 percent.

This is, of course, of special interest now to the New York Yankees, who may find themselves submitting eight-figure insurance claims due to injuries to ace pitcher C.C. Sabathia and rising star Masahiro Tanaka.

It’s possible that the Yankees’ premiums for Sabathia totaled about $13.1 million, meaning that it’s safe to assume the insurer is not simply going to write a check for over four times the premiums without a fight.

Sabathia, who had been sidelined since May 10 because of degenerative damage to his right knee, will miss the remainder of the 2014 season as he is scheduled to undergo arthroscopic debridement knee surgery.

On July 12, the Yankees announced that Tanaka has a partially torn ulnar collateral ligament in his pitching elbow which could keep him out of the lineup for six weeks and possibly longer.

Individual Policies

Unlike baseball, which requires teams to purchase individual policies for player contracts, the NBA and the NHL each have league-wide plans for their teams. By pooling risks in this way, insurers are able to project claims more accurately and thus reduce the premium costs to less than 5 percent, instead of 10 percent in baseball policies.

MLB player policies work this way: If a player’s multi-year contract is insured for the first three years and the player sustains a career-ending injury during that initial policy period, the insurer will pay off on a percentage of the total contract value.

However, if the player gets through the first three years without injury and the team wants to maintain insurance coverage for that contract, the club will have to secure new coverage for the remaining years of the player contract at a higher premium based on new underwriting criteria such as the player’s increased age and any new medical issues.

In January 2014, Tanaka signed a seven-year, $155 million deal with the Yankees, which pays him $22 million in each of the first six years and $23 million in the last year. If insurance was purchased, a claim could reimburse the team for a percentage of the remaining monies due the pitcher this season.

If, Tanaka’s injury turns out to be career-ending, the Yankees could potentially recoup between 50 percent and 80 percent of the total amount of the deal (less salary paid to date), depending on the type of insurance coverage purchased.

As with most insurance products, the premium cost for MLB player contracts is tied to a number of underwriting factors such as the length and total value of the contract, the player’s age and injury history, and whether there is any history of substance abuse or use of performance enhancing drugs.

As for Sabathia, the remainder of his seven-year $161 million deal signed in 2008 requires the team to pay him $23 million this year and in 2015; $25 million in 2016; and there is a $25 million vesting option for 2017, including a $5 million buyout that becomes guaranteed under a plan that is tied to the health of his pitching shoulder.

If Sabathia is unable to pitch again because of his current knee injury — as opposed to a shoulder injury — the Yankees will be obligated to pay him his full salary through 2017.

Little is known about the insurance coverage purchased by the Yankees for these pitchers, but some sources have reported that if Sabathia cannot pitch again, insurance would pay out about $58 million — which is 80 percent of the $73 million owed him for the 2015 through 2017 seasons.

Those same sources have also reported that the Yankees might also receive an additional $10 million insurance payout, which would be 65 percent of what is left on Sabathia’s $23 million salary for this season.

It’s possible that the Yankees’ premiums for Sabathia totaled about $13.1 million, meaning that it’s safe to assume the insurer is not simply going to write a check for over four times the premiums without a fight.

Underwriting and Exclusions

As contract values escalate, insurers are becoming more aggressive with policy exclusions and limitations. According to the former general manager of the Arizona Diamondbacks, “you can have a policy effectively excluded out from under you.”

Some pitcher contract policies exclude coverage for elbow and shoulder injuries. Pre-existing injuries are also generally excluded, which could result in another dispute over the Sabathia claim, since he had arthroscopic surgery in 2010 to repair a torn meniscus in the same knee.

It was in 2001 when the Baltimore Orioles filed a $27 million claim after Albert Belle was forced to retire due to an arthritic hip that insurance carriers began to increase premiums for MLB contract coverage. It is estimated that the Orioles received between $20 million and $23 million to cover the $39 million left on the last two years of Belle’s contract.

The Belle claim, coupled with claims arising out of 9/11, prompted insurance companies to become more cautious about the types of risks they were willing to insure and shortened from five years to three years the coverage term for baseball policies.

As with most insurance products, the premium cost for MLB player contracts is tied to a number of underwriting factors such as the length and total value of the contract, the player’s age and injury history, and whether there is any history of substance abuse or use of performance enhancing drugs.

There is a belief among insurers that a player using steroids is more likely to be injured and less likely to recover quickly.

Another truism of MLB player contract policies is that pitchers generally cost more to insure than position players because of the increased potential for injury to pitchers based on the physical stresses associated with throwing a baseball at 90 mph or 100 mph, and the different pitches that strain elbows and shoulders.

In addition to the physical issues, starting pitchers are also more expensive to insure because they are paid more. For example, the five starting pitchers on the Los Angeles Dodgers represent nearly 33 percent of the team’s $239 million payroll in 2014.

The availability of insurance can also play a role in whether a team even offers a player a new contract.

For example, in 2009, the Arizona Diamondbacks were looking to extend the contract of pitcher Brandon Webb for three years at a value of $50 million. Even though Webb passed a team physical, the Diamondbacks were advised that their insurer would not cover injuries to Webb’s pitching arm.

Based primarily on the inability to procure insurance for the contract extension, the team pulled Webb’s offer.

With the aid of hindsight, that decision seems prophetic because a series of shoulder injuries to Webb’s pitching arm sidelined him for much of 2009 through 2012 and, after several aborted comeback attempts, he retired in 2013.