Joe Balice’s article “Fantasy Football Insurance: Busted Coverage” appeared in leading national legal publication Law360’s September 19, 2013 issue.
Law360, New York (September 19, 2013, 6:27 PM ET) —
Vince Lombardi once said, “Football is like life: it requires perseverance, self-denial, hard work, sacrifice, dedication and respect for authority.” He forgot “insurance.” Well, for your fantasy football team, anyway.
Almost 40 million Americans play fantasy sports each year, and that number continues to grow. To capitalize on this growth, at least two websites have popped up purporting to insure fantasy football teams. There’s nothing terribly surprising about industrious insurance companies ginning up new risks to underwrite and new products to sell. But on closer inspection, these contracts have more in common with the betting slips from a casino sports book than insurance policies your local insurance agent sells. Although the proprietors of these companies compare their products to the disability policies bought by professional sports teams for their players, and players buy for themselves; in reality, they differ in some very important ways.
To understand these differences, you first have to understand what fantasy football is: a game in which a group of participants (“owners”), usually colleagues or friends, form a league to compete against each other based on the week to week statistical performance of National Football League players. Before the NFL season starts, the owners hold a draft (or maybe an auction) to divvy up the desirable players and compile their rosters. Teams are typically comppsed of a quarterback, some combination of running backs, wide receivers and tight ends, a defense, and a kicker (with backups for key positions).
Each week during the NFL regular season, fantasy teams square off against each other, earning points based on their players’ performance in the real-life NFL games. Whichever squad scores more points that week wins, and the teams accumulating the most wins have a short playoff during the last few weeks of the NFL season to name a champion. (Fantasy baseball and basketball also exist, but fantasy football is by far the most popular.)
Why do people play fantasy sports? Because there is usually an entry fee and transaction costs, and the top teams can win hefty sums at the end of the season. In short, these colleagues and friends are gambling with each other. To be fair, some people play fantasy football for fun and free. More often, serious owners join a league with the hope of collecting winnings come January.
Enter fantasy football insurance. An interested owner can protect his or her “investment” (a.k.a. entry fee) by covering, or insuring, a player they “own” from a list of eligible players on the insurance company’s website. For example, Tom Brady or Payton Manning is so integral to a fantasy owner’s chances that any injury to those quarterbacks could ruin the fantasy owner’s season.
Ostensibly, the owner will insure a player so valuable that his extended absence due to injury would doom a fantasy team to certain failure. The owner then determines how much “coverage” to buy. Prices may vary depending on a few different factors (coverage options, a player’s history of injuries, etc.), but the going rate appears to run about 10 percent of the insured amount. For example, one website offered to sell, for the low price of $47, a “policy” that would pay me $500 if Pittsburgh Steelers quarterback Ben Roethlisberger (“Big Ben”) misses nine games due to injury this season. Thus, if I had a fantasy football team, and had drafted Big Ben to be my quarterback, I might consider “insuring” my entry fee by picking up one of these policies.
Let’s say I buy the policy — what am I really insuring? Enter insurance law. All insurance policies require something called an insurable interest. An insurable interest, generally speaking, means that a person has a recognizable monetary interest in a thing they want to insure. People buy insurance policies to cover bodies, homes, cars, businesses and lives. We buy insurance for these things because we have an insurable interest in them — if something bad were to happen to them, it would harm us. That interest allows to us to buy an insurance policy to manage the risk of loss.
To form a valid insurance contract, the insurable interest must exist both at the time the policy is purchased, and at the time of the loss triggering coverage. If the policyholder has no insurable interest, then the insurance policy is typically deemed void (although some courts will still enforce the policy against an insurance company accepting premiums knowing that no insurable interest exists). A mere “contingent” or “expectant” interest that isn’t based on a legal interest or right is typically not enough to be insurable.
A most common example is this: I can buy an insurance policy to cover my house, because I own it. I paid for it, and I live in it. If it were to burn down, I would be in a world of hurt. But what about my next-door neighbor’s house? I like my next-door neighbors. They’re nice people. But I don’t own their house, I didn’t pay for it, and I don’t live in it. If their house were to burn down, I would feel terrible for them and would do what I could to help, but my life wouldn’t technically be impacted in any legal or monetary way. If I were allowed to buy an insurance policy that paid me if their house burned down, my policy would simply be a wager on their house burning down. Public policy discourages that kind of arrangement, so we require an insurable interest to form a valid insurance contract. Otherwise, I’d be hoping their house burns down so I would get paid.
That’s basically how fantasy football insurance policies work. Is owning a player on a fantasy football team, and betting on that team, a sufficient legal interest to insure? Probably not. Technically, betting on fantasy football is probably legal in most states, especially those that allow betting on games of “skill.” It’s not a violation of federal law: The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), which attacks funds transfers associated with Internet gambling websites, specifically carves out fantasy sports from its reach.
Still, it is undeniable that a fantasy football owner’s sole monetary interest in their players is based on the bet they made when paying the league entry fee. The whole purpose of the insurable interest is to prevent using insurance policies as a form of gambling — fantasy football insurance is a wager on a wager. It would make little sense that this could be an insurable interest. Moreover, there are some states where the law is less clear, and betting on fantasy football may well violate state anti-gaming laws. In those cases, an insurable interest definitely does not exist.
Even if fantasy football ownership could conceivably be an insurable monetary interest, these insurance companies have no way of confirming interest. Although owners are required to disclose the name of their league and team before purchasing a policy, it’s highly unlikely that the company is actually confirming that the owner drafted the player in question before purchasing the policy. (In 2010, as an experiment, I purchased a small fantasy football insurance policy on a player I had never drafted on my team — the policy was sold to me without issue).
Moreover, even if the owner has a player on their roster when purchasing the policy, there’s nothing to stop them from trading the player to another team in the league, or dropping the player from their roster if the player is bad or not helping the fantasy team. Traditionally, if an insurable interest disappears by the time the loss occurs, then the policy is void. Most importantly, even if the insurance company could and did confirm that the player was owned at the time the policy was sold and was never dropped, it has absolutely no way of knowing whether the owner has any monetary interest in the player.
League entry fees are commonly handled separately from the website used to run the league (which makes its money through small service fees and/or advertising revenue). When an owner buys a fantasy football insurance policy, they represent to the insurance company how much they invested in the team, and the insurance company sells the policy, regardless of whether that’s true or not, and the insurance company has no way to confirm that information.
Absent a valid insurable interest, a fantasy football insurance policy is simply a bet that a player will get seriously injured. Moreover, it’s gambling on the Internet, which is problematic. This isn’t the only fantasy football offshoot that has blurred the lines under federal anti-Internet gaming laws. Many commentators have recently been scrutinizing whether “daily fantasy sports” games offered online also violate the UIGEA. Rather than span an entire season, these “daily games” allow a player to go online, pick a few players the gambler expects to perform well, wager on their performance in games that day, and get immediate gratification. It’s not much different than the popular proposition bets gamblers can make at Las Vegas sports books (particularly popular around the Super Bowl), and the “daily games” appear to fit through the UIGEA loophole for fantasy sports.
However, unlike the “daily games,” fantasy sports insurance policies likely violate not only the spirit of the law, but also the letter. As stated above, the UIEGA prohibitions against funds transfer for online gambling carve out fantasy sports in which “all winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals … in multiple real-world sports or other events.”
Thus, it’s acceptable under the UIGEA to bet on fantasy football because the outcome reflects the knowledge and skill of the owners in managing their teams and is determined predominantly by the “accumulated statistical result of the performance” of the NFL players on each owner’s team. A fantasy football insurance policy? No so much. Although some might argue whether there’s knowledge or skill involved in betting on which players will get seriously injured, the outcome of the policy/bet doesn’t involve the accumulated statistical result of the player’s performance — it’s just betting on whether the player will get seriously injured. (Note, however, that consumers have no liability under the UIGEA: The law targets the financial institutions that process transactions for unlawful Internet gaming.)
In all likelihood, most fantasy football insurance policy purchases are probably well intentioned. It’s unlikely that anyone is really buying one of these policies for the intended purpose of betting that a player will get injured. I expect that most “policyholders” have a fantasy football team that they’ve put a few hundred dollars (or more) into, and they want to hedge their bets.
Nevertheless, the policies aren’t true insurance policies under the fundamental principles of insurance law, and they probably run afoul of the UIGEA as well. If these insurance policies take off in popularity and enter mainstream consciousness, it will be interesting to see what state and federal regulators do to address the issues we’ve just discussed.
–By Joseph G. Balice, Brutzkus Gubner LLP
Joseph Balice is a senior associate in Brutzkus Gubner’s Los Angeles office.
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