Modeling the NFL's Insurance Loophole for Cap Space.
A Quantitative Measure of How Teams Use Insurance to Gain a Competitive Edge .
In a recent ESPN article, Kalyn Kahler ignited some discussion by revealing how teams exploit insurance policies on player contracts as a clever salary cap workaround.
To give a brief summary (although this is a slight oversimplification):
Let’s say that in 2024, Team A signs a quarterback to a 1 year/$40m deal.
Team A purchases insurance on this deal, stating that for every game this quarterback misses, Team A wants $1.3M. It’s not dissimilar from making a large investment on a home and seeking downside protection with home insurance.
Team A pays roughly $6.5M a year to an insurer for this right. Crucially, this money comes from the team owner’s pockets, not from the ~$255M salary cap budget earmarked for player spending.
The 2024 season goes on, and the quarterback misses 4 games. After the season, Team A files a claim and “earns” $5.2M ($1.3m x 4 missed games).
Importantly, the $5.2M Team A receives from this insurance claim can accrue towards the team’s salary cap budget for next year.
In effect, Team A “purchased” $5.2M of cap space for $6.5M.
The following blurb from Article 13 of the NFL’s CBA enables this loophole:
(b)(iv) Credit for Salary Forfeited or Refunded.
Insurance proceeds received by a Team as beneficiary to cover the player’s inability to perform services required by his Player Contract shall be deemed a “refund from the player” if (a) the Club or the player purchased the policy… such amount… shall be credited to the Club’s Team Salary for the next League Year.
A former NFL executive called it “a rabbit hole most people know nothing about." In fact, Kahler revealed on ESPN Daily that one exec was not even aware of the tactic.
With the lack of substantive information, it’s hard to be exactly correct. Instead, my goal was to model out a system in an effort to be directionally correct.
I. Some Scratch Math
We do know that the Cowboys purchased a league-high $87M insurance policy for QB Dak Prescott’s new contract. I used this policy to build a rough model for how the economics shape out:
A few notes on the assumptions:
According to this study, NFL QBs miss, on average, roughly 10% of games each season due to injury. It’s possible the numbers have shifted since 2020, but approximating 7 missed games over 68 games is a comfortable mean/base case.
From Kahler: “per insurance industry sources, if a club wanted to insure $40 or $50 million of a contract, it would cost them somewhere between $1 or $2 million per year.” This suggests a 2.5%-4% insurance rate (which feels… cheap?) but later mentions that “per-missed-game payouts” (as we’ve modeled) are more expensive. The rate is an adjustable parameter, but we settled on 6.5% — meaning the Cowboys are on the hook for $5.65M/year premium or $22.6M over the four year contract.
After a deductible (more below) and assuming 7 missed games, the Cowboys are slated to spend $24.8M over 4 years and recoup $6.78M from the claim. In other words, Dallas is spending $24.8M in exchange for an additional $6.78M of cap space in 2028.
Implicitly, this places a 3.7x dollar premium on cap space — meaning that every $1 of extra cap room is worth $3.70 out of owner Jerry Jones’ pocket.
II. Game-based Deductibles
Kahler also suggested that deductibles can be structured in game-based increments — activating after a certain number of missed games rather than as upfront payments. For instance, if the Cowboys choose a 10-game deductible, they would only receive compensation if Prescott misses 10 or more games. This approach aligns with a key purpose of deductibles: preventing claims for minor issues.
Modeled below are three hypothetical scenarios for Prescott’s insurance; 1) low deductible, high rate, 2) average in both categories, and 3) high deductible with a low rate.
The key metric in this model is “spend per $1 of cap space”, effectively asking: “how much of a premium (if any) is an owner willing to spend on additional cap space?”
Ownership liquidity is one of the more important factors impacting the choice between these three options. If downside-protection is the true driving incentive, lower rates and high deductibles seems logical. In this case, a front office is fine with missing out on incremental cap earnings and is more focused on getting the best value if disaster hits.
Kahler cites the 49ers and Eagles as more aggressive teams focused on building a cap advantage through this mechanism. These clubs are more likely to choose the first option: higher rates for no deductible. The spend per incremental dollar of cap space will be higher, but these teams are guaranteed cap space in the event of any injury.
These teams are also more likely to build a portfolio of claims (ex: the Eagles have insurance on 16 players) that “average out” to a million or two in added salary cap space per year. With this diversification of claims, teams can pool risk and potentially find better rates.
However, teams with one policy on a $50m contract, for example, expose themselves and their insurers to potential variance. These claims resemble more of an all-or-nothing proposition and insurers may seek higher rates for handling this risk.
It would be interesting to explore cut-off boundaries, meaning ownership draws a line at spending $2.50 per additional $1 of cap space, for example. Anything higher than this premium would be considered off limits, and cap staffers can build models accordingly.
III. The NFL “Market” is Fascinating
Stepping back from the details, there's a fascinating angle here from an economist's perspective. From David Romer’s "Do Firms Maximize?" and Massey & Thaler’s “Losers Curve”, economists have consistently looked towards the NFL to explore market behavior.
Framing this mechanism as paying $2.50 for every $1 of salary cap space simplifies the issue, but the extra $1.50 doesn't vanish: it ends up in the insurer's pockets.
This practice, however, is not exploitative — it’s a win-win for both sides. For NFL teams, an extra dollar in cap space is worth more than a traditional dollar. This is where the market inefficiency lies and where insurers, in turn, become vehicles to arbitrage this value difference.
After Kahler’s article, it will be interesting to see if more insurers become aware of the practice and enter this market. In theory, this would drive down premiums and deductibles as competition would increase.
This dynamic could be accelerated by private equity firms who are now permitted to invest in NFL teams. This unlocks additional liquidity for ownership groups but also expands the pool of insurers. Firms like Apollo already have insurance branches who are now just a phone call away if they’re already on the cap table.
IV. Leftover Thoughts
Given the Eagles insure 16 players, it’s natural to wonder how a fully insured 53-man roster would look.
There’s a “time-value of money” component of the salary cap to consider. Where $25M was 13.3% of the cap in 2019, it’s only 9.8% of the cap now. The longer teams wait for payouts, the less valuable the payout.
It’d be interesting to model the distribution of projected missed games. Position, injury history, age, and other parameters are all valuable in that determination. Maybe a Weibull distribution or another decay-like function is the best fit?
The thought that teams with turf fields (i.e. Jets/Giants) may have to pay more in premiums than teams with grass fields is amusing.
A huge shoutout to Kalyn Kahler for her excellent reporting!
Good work Smit. Interesting how this is becoming a thing publicly, despite the practice has been around for the 15 years I've been covering the NFL salary cap.