With no coronavirus protection, the NBA will gamble on liability coverage in Disney's bubble

The National Basketball Association will restart its season later this month with a league-wide general liability insurance policy that will not reimburse it for expenses if games are canceled at the bubble campus at Disney World in Orlando.

The policy will protect the NBA from interruptions like weather-related or structural problems that prevent buildings from operating. It will also cover incidents involving bodily injuries and property damage resulting from services and operations, CNBC has learned. But the policy will not cover the cost of expenses associated with the bubble, which amount to more than $150 million. The estimated cost for a league-approved individual to attend the bubble is $60,000, according to a person will knowledge of the NBA’s planning.

Though players could be covered under workman compensation laws in Florida, the league is also exploring the insurance marketplace, hoping to transfer some of the risks. Still, no Covid-19 or any other virus protection is available, insurance experts told CNBC.

“The policies the professional leagues will need to obtain will need to be new policies based upon the new situation that we’re in,” said Alan Taylor, the co-chair of law firm Segal McCambridge Singer & Mahoney’s professional liability unit.

The NBA declined to comment on its insurance policy for its Orlando bubble campus.

When the SARS strain of coronavirus hit around 2002, insurance experts told CNBC firms that offered virus protection rearranged polices only to offer sub-limits. For example, that means if a general policy was worth $10 million, and a virus is related to any interruption, that policy value could be reduced to $1 million or whatever was agreed to in the policy.

The Zika virus, which threatened the 2016 Summer Olympic Games in Brazil, also kicked off a reaction by insurance companies to begin to eliminate virus protection. Pandemic-related event cancellations policies triggered Wimbledon’s estimated $141 million payout and the NCAA ($270 million) also benefited from this type of insurance, which is no longer available.

The NBA and other leagues will have a few options to reduce some of the risks associated with its resumption plans. The league could select to use the self-insurance option. It would use its funds and allow outsiders to acknowledge the health and safety protocols and strictly enforce those protocols to avoid potential lawsuits.

The NBA generally self-insures its more significant events like the All-Star Game and NBA Finals. This option is currently being used by The Basketball Tournament (TBT), which said its bubble in Columbus, Ohio, costs $1 million, including self-insurance, daily testing and hotel rooms.

Jon Mugar, TBT founder and CEO, told CNBC he monitored the event to  “make sure our protocols are carried out” to combat Covid-19 during his tournament, which ended Tuesday.

Leagues will need to use this option until virus protection is offered, which some insurances executives say will not occur until a federally funded option available, similar to terrorism insurance, which only became possible once the government backed it.

If the NBA does find additional insurance to cover its bubble, it may have to negotiate. The league could carve out some risks to entice an insurance company to accept and offer a reasonable premium to help it recover the cost of its bubble.

“There are certain elements that may be insurable and other elements may not be,” said Ken Radigan, the CEO of Professional Risk Manager’s International Association and a professor at Columbia University. “When things like this happen, often times insurance companies will try different things out. They know they have people that are willing to pay a premium to transfer the risks, and it’s important for them that they transfer it.”

Leagues and insurance firms would also need to identify triggers that would activate a Covid-19 policy, said Darren J. Hickey, entertainment and sports specialty expert at insurance brokerage firm HUB International.

“It’s going to take [a company] who has a firm understanding of everything the NBA is doing to operate safely,” Hickey said. “If [Covid-19 insurance] is there to be attained, I’m confident [the NBA] can find it.”

If the NBA insured a league event in normal times, like a general policy valued at $100 million, it would pay a premium of roughly $500,000 or more, experts tell CNBC. But during this pandemic, premiums have increased. 

Taylor said Covid-19-related insurance would likely be far too expensive for the NBA to pay.

“The insurance company is only writing this policy because it’s going to make them money,” he said. “And given the risks that they have to pay out on it, the cost will be prohibitive to cover the policy.”

Again, with so much capital lost due to Covid-19, the insurance sector isn’t able to take on any Covid-19 risks. So sports leagues will likely be out of luck. What could help leagues are laws currently being discussed preventing businesses from being held liable for Covid-19 related claims.

Also, one insurance official mentioned products like Avadim Health’s Theraworx Protect. The company claims to have ingredients that can protect individuals for hours and says it’s used by hospitals nationwide, but it hasn’t been proven to work against the coronavirus.

If accurate, and spectators are allowed in, leagues could provide products like Theraworx to fans to entice them to return, should local regions allow gatherings. And that leads to what some experts said will be the next big discussion and revolve around “assumption of risk.”

“There is a lot that we’re going to learn from this,” Radigan said. “We have three things that are happening, all of which have an impact on insurance. Social unrest, economic downturn and a pandemic are each separate – it’s important to understand them separately, but it’s also important to understand how they work together. It is a very interesting time.”