Author Archives: Morgan O'Rourke

About Morgan O'Rourke

Morgan O’Rourke is editor in chief of Risk Management magazine and director of publications for the Risk & Insurance Management Society (RIMS).
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Billy Beane and Baseball’s Big Spenders

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For me, the surest sign that spring has arrived is the beginning of the baseball season. And although the season officially kicked off with a series of games between the Oakland Athletics and Seattle Mariners last week in Japan, it really began in earnest last night when the defending World Series champion St. Louis Cardinals beat the new-look Miami Marlins on Opening Night.

In the spirit of the new baseball season, I recently had the chance to speak to Billy Beane, the general manager of the aforementioned Oakland A’s and the subject of the book and movie Moneyball, for the latest issue of Risk Management. Beane will also be delivering a keynote address at the upcoming RIMS 2012 Annual Conference & Exhibition in Philadelphia. In our interview, Beane discussed how he uses data to run a competitive baseball team and addressed some of the risk management and insurance concerns that a general manager of a baseball team has to face.

One comment I found particularly interesting was the following:

About 10 years ago, we’d insure player contracts. What’s interesting is that, for years, say you signed a player to a five- or six-year contract, you could get that entire contract insured. And I remember one time [our insurer] came to us and said they’re no longer going to insure contracts for longer than three years. After three years, they need to be underwritten again. And my assistant and I said, “that’s an insurance company telling us that it’s not a good idea for us to sign players beyond three years.”… So that was basically them telling us these aren’t good bets.

What makes this comment so interesting is that it doesn’t seem like this philosophy is shared around the league. For instance, this past offseason the Los Angeles Angles of Anaheim signed first baseman Albert Pujols to a 10-year, $240 million contract while the Detroit Tigers gave first baseman Prince Fielder $214 million over 9 years. Not to be outdone for the privilege of paying players $20 million a year, just last week the Cincinnati Reds gave their star first baseman Joey Votto a 10-year, $225 million contract extension, while the San Francisco Giants extended pitcher Matt Cain’s contract by 5 years for $112.5 million.

Regardless of the value of these contracts, they all go against Beane’s (and his insurer’s) no-more-than-three-years rule and it’s hard to see how these players will deliver full value on their deals. Granted they are some of the best players in the game right now but injury and age could take their toll on performance at any time. Pujols, in particular, may be one of the greatest baseball players of all time, but he is 32. Not many players, no matter how good, are still productive (or even able to play) in their 40s. These signings seem to illustrate the difference between baseball’s big markets haves and it’s small market have-nots like the Oakland A’s. The richer clubs are simply able to take on risks that Beane cannot.

Or maybe there’s a more insidious method to their madness, as Jonah Keri writes on ESPN’s Grantland:

Sweating potential value, opportunity cost, and other related principles might be focusing on the wrong details. The recent $2 billion Dodgers sale points to a baseball landscape that has changed dramatically. Current and prospective owners see an industry that grew revenue through a tough recession and now stands poised to rake in far more money, with media deals rising, the economy improving, and the game in the midst of its longest period of uninterrupted labor peace since the advent of free agency.

According to Keri, these owners are making what they think are smart choices given the current market. But these choices may be based on the assumption that that the value of their clubs can only go up into the rarefied billion-dollar air.  So what’s a few hundred million here and there? A baseball team is basically a license to print money. Obviously, nothing can ever go wrong with that strategy. Right, housing market?

JetBlue Pilot’s Meltdown Tests Emergency Procedures

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A JetBlue flight from New York to Las Vegas had to be diverted to Texas yesterday after the plane’s captain had an apparent breakdown, requiring emergency procedures to swing into action that resulted in the pilot being locked out of the cabin and restrained by passengers and crew.

According to reports, the incident began when the co-pliot noticed that Captain Clayton Osbon was “acting erratically” in the cockpit and was flipping switches unnecessarily and seemed incoherent. The co-pilot persuaded Osbon to leave the cockpit and then locked the door behind him and changed the security code. Osbon became more agitated and began running up and down the aisle before banging on the cockpit door demanding to be let back in. Crew members attempted to calm him down but he became more irate and reportedly began screaming about Iran, Iraq, Afghanistan and Al Queda and that the plane was “going to be taken down.” Eventually a group of passengers, led by security personnel who were on their way to a conference in Las Vegas, tackled Osbon, restrained him with seat belts and sat on him for the remainder of the flight. An off-duty pilot who had also been a passenger assisted the co-pilot to safely land the plane in Amarillo, Texas, where Osbon was taken to a local hospital for observation. None of the 131 passengers or six crew members were harmed.

Osbon, who was a 12-year veteran of JetBlue and and a flight standards captain in charge of cockpit and safety procedures was described as a “consummate professional” by company CEO Dave Barger and had no history of incidents in the past. The FAA does require medical checks every year for pilots under the age of 40 and every six months for pilots older than 40. Although there is no formal psychiatric evaluation, these assessments include mental health questions and fellow crew members are trained to be on the lookout for any signs of mental distress.

Judging by the quick-thinking actions of the co-pilot and crew, with a big assist from the passengers, the system worked:

“I’d say the system functioned properly,” said Dave Funk, a retired Northwest Airlines captain and an aviation consultant with Laird & Associates. “There’s a reason we have two pilots. There’s a reason we have flight attendants. … One healthy pilot on the flight deck who’s qualified would have no problem landing the plane.”

This was the second incident this month in which passengers had to subdue unruly airline personnel. On March 9, passengers helped restrain an American Airlines flight attendant who got on the intercom before takeoff and ranted about 9/11 and airline safety before finally being removed from the plane.

Property Insurance and Disaster Recovery

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How well a company can recover from a disaster often hinges on the quality of the recovery plan. And as Joshua Gold and Lawrence Bartelemucci of Anderson Kill & Olick point out in a new article, this plan needs to be in place before a disaster strikes. In order to develop the most effective plan, certain key considerations, both from an insurance perspective and a property perspective, must be addressed. Developing a checklist of these items can make all the difference. For example:

  • Is your space worth rehabilitating? If it is, then your company will need to contract for design and construction services to rehabilitate the current space or rebuild on site. If the space that will be rehabilitated is leased, your company needs to coordinate its efforts with the landlord.
  • If it is not worth rehabilitating, then your company must consider how it will dispose of the space (for example, selling the property or cancelling the lease), and how it will acquire new permanent space. In addition, your company will need to contract for design and construction services for its new space. This process should involve a zoning analysis to ensure that your company can build what it needs and conduct its operations on the chosen site.

For more insight, be sure to check out their article, only on RMmagazine.com.

D&O Insurance: The Cooperation Clause and Privileged Communications

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Directors and officers and the insurance companies that insure them often have a complicated relationship that can be both cooperative and adversarial. And as Richard Giller of Alston & Bird LLP explains in an online exclusive article, this relationship becomes even more complicated in the face of a lawsuit that strains the parties’ ability to communicate. He discusses how this effects the cooperation clause of the policy and the ramifications of sharing confidential or privileged information with a D&O insurer.

Because sharing information with a D&O carrier may be critical to assist in the evaluation of liability risks, the cooperation clause had been described as a material provision of the policy and a condition precedent for the insured’s rights under the policy. A breach of the cooperation clause that causes actual and substantial prejudice to the carrier may operate to relieve the insurer of liability under the policy. Thus, the risks associated with the failure of a policyholder to cooperate could be catastrophic.

Giller also offers useful strategies that policyholders and carriers could employ in order to maintain the confidential nature of their communications, including joint defense and confidentiality agreements. So be sure to check out his interesting and informative article, only on RMmagazine.com.