Oregon Football’s Painful Lesson in Insurance Hedging

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In the collegiate athletics arms race, universities and colleges attempt to obtain elite coaches by offering unique compensation packages. Last year alone, Alabama football head coach, Nick Saban, received compensation in excess of $7 million. In addition to hard dollars that coaches receive, universities may provide other intangible perks, such as the use of private jets, rental cars or endorsement deals. The aforementioned Saban had his own $3 million home mortgage paid off by boosters for the University of Alabama.

Similarly, the University of Oregon pays football coaches handsomely. The previous coach, Chip Kelly, earned an annual salary ranging from $3 million to $4 million. In addition to his annual compensation, Kelly earned performance bonuses based upon the team’s win-loss record. During the 2012 season, the Oregon football team finished with an overall record of 11-1 and finished as one of the top teams in the country. Per its contractual obligations with Kelly and his staff, the University of Oregon paid out $688,000 in performance bonuses.

In order to hedge against the performance of its football team, the university purchased a type of insurance product created to hedge against the risk of bonus incentives to be paid to coaches. This “bonus incentive” insurance coverage is a relatively new financial product created by insurance companies to assist athletic departments in the management of risk. The first known instance of bonus incentive coverage occurred in 2001 when the University of Maryland purchased the insurance hedging for its struggling football team. In somewhat of a surprise, the 2001 Maryland football team shocked football pundits by winning its conference and appearing in the Orange Bowl. At that time, the University of Maryland paid a paltry insurance premium because the Maryland football team had a questionable track record. Shortly thereafter, more universities sought out bonus incentive coverage to hedge against the possible risk of successful football seasons.

In the case of Oregon football, the university negotiated this specialty insurance hedging product with Marsh U.S. Consumer (Marsh). The general counsel for the university, however, instructed the athletic departments to utilize Gallagher Risk Management (Gallagher) to procure insurance for the coaching staff. Indeed, Gallagher was the preferred risk management group for the university and generally handled all insurance coverage issues. Gallagher, Marsh and the university heavily negotiated an insurance policy that would cover the potential bonuses that could have been earned by the university. In conversations, representatives of Gallagher assured the university that the policy in place would cover all bonus scenarios, such as whether the football team went undefeated or lost a handful of games. The university paid almost $500,000 for its insurance premium for the 2012 football season.

In 2012, the Oregon football team placed second in the Pac-12 football conference and beat Kansas State in the Fiesta Bowl. The university paid bonuses to its staff; however, when tendered with an insurance claim, both Gallagher and Marsh denied the claim. In their denial of coverage, the insurers interpreted the policy to mean they would only pay the claim if maximum bonuses were paid out and not the lesser bonuses that were actually paid. The university brought suit to enforce the provisions of the policy. See Univ. of Oregon v. Drummer, No. 6:15-CV-00260-AA, 2015 WL 7015316 (D. Or. Nov. 10, 2015).

Generally, “[t]he insured bears the initial burden of demonstrating coverage, [and] the insurer carries the burden of establishing the applicability of exclusions.” Midwest Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628, 636 (Minn. 2013) (citing Travelers Indem. Co. v. Bloomington Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006). “Provisions in an insurance policy are to be interpreted according to both the plain, ordinary sense, and what a reasonable person in the position of the insured would have understood what the words to mean.” Farmers Home. Mut. Ins. Co. v. Lill, 332 N.W.2d 635, 637 (Minn. 1983). Any ambiguity is to be resolved in favor of finding coverage for the insured. See Prahm v. Rupp Const. Co., 277 N.W.2d 389, 390 (Minn. 1979).

In the case of Oregon football, the university alleged that the insurers were negligent in failing to provide the requested coverage, or that the insurers negligently misrepresented that all potential bonus scenarios would be covered by the insurance policies. Ultimately, the parties agreed to settle the dispute after months of contentious litigation. In the settlement, Oregon football received $242,000 in exchange for a release of all claims against the insurers. The Oregon football program lost approximately $1 million, since it paid the premium and the bonuses, yet received minimal funds from the insurers in the settlement.

In the modern age of college football, the race is on to win national championships, five star recruits and conference rivalries. To obtain these desired outcomes, universities and colleges are spending astronomical amounts of funds. In order to reduce the risk, some organizations might hedge against future performance by obtaining insurance coverage for bonus provisions. The University of Oregon, however, has demonstrated a painful reminder to colleges and universities to verify that their proposed policies cover all possible scenarios. If done properly, these insurance hedges can prove advantageous to the bottom line. Aalok K. Sharma

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