We are in the slowest time of the year for the business of the NFL, so I thought it’d be a good time to answer your questions. I put out a call and got a lot of repeat questions, so I’ll answer the most frequently posed ones here.
I understand the intrigue about the practice, but to me this is less “buying cap space” than simply a risk-reward analysis conducted by every team on whether paying out large insurance premiums (with non-salary cap dollars) for the sometimes marginal possibility of return of those monies for some future cap relief. A few teams buy policies on several players. Some teams buy policies on their star quarterbacks, but no one else. And some do not enter this market at all.
The key questions in analyzing this issue of taking out insurance on player contracts are what type of insurance, and what are the cost of premiums? There is PTD (permanent total disability) insurance, in which the premiums are quite reasonable, with payouts highly unlikely (very few players are permanently disabled from playing football).
Then there is TTD (temporary total disability) insurance, which will obviously trigger payouts much more often than PTD. But as you may expect, in a sport with a 100% injury rate, the premiums for TTD insurance are going to be quite high. Several insurance companies will not offer TTD, and the ones that do require potential exclusions for preexisting injuries. Per the article referenced above, TTD premiums to insure a contract of roughly $50 million could cost up to $2 million. And, again, the payout is not as simple as a team getting back money for missed games on a pro rata basis. There are clauses that only trigger claims after a number of missed games, there are deductibles, and there are exclusions and other hurdles. As everyone reading this knows, insurance companies do not part easily with their money.
When I worked for the Green Bay Packers, I purchased PTD policies for a couple of our larger contracts, including Brett Favre’s, but did not see the cost effectiveness of paying high premiums for TTD.
Having said that, if a team and owner’s goal is purely future salary cap credit, regardless of cost, this does have some potential value. Certainly, since my time in the NFL where our cap department was “me,” now NFL team cap departments have two to five people, sometimes more. They have more personnel and more resources to try to separate themselves from other teams; that is why I see this practice may be more popular.
What teams are trying to do is earn future cap credits, similar to other future cap credits albeit in this case “paying” for them. When a player doesn’t earn a workout bonus or an incentive that previously counted against the cap, that triggers a future credit. If a team received monies from an insurance policy, it presented that to the NFL in order to receive cap credit for the following year.
Is this a practice that has been going on for years with NFL teams? Yes. But is it a massive loophole in the cap system? Not really. It’s just a tool that some teams and owners see value in—with a debate as to its cost-effectiveness—as a way to get back some cap room for future years.
