Bonus Saved at the Wire

Many horseplayers in the crowd of 140,000 at Saturday’s Kentucky Derby were betting on Smarty Jones. But there were a few insurance companies betting against him.

When Smarty Jones, the Derby favorite, won the race, owners Patricia and Roy Chapman earned a $5-million bonus offered by Oaklawn Park, a track in Hot Springs, Ark.

Months earlier, Oaklawn’s owners took out an insurance policy covering half the bonus. They secured a second policy for the remaining $2.5 million just two days before the Derby.

The insurers may have been banking on Derby history: Smarty Jones was only the second favorite to win the Derby since 1980.

“I’m still numb,” Oaklawn’s president, Charles Cella, said Monday from his office in St. Louis. “This whole thing has been quite a deal.”

To promote the 100th anniversary of Oaklawn, Cella offered the bonus to any horse who won two races at his track -- the Rebel Stakes and the Arkansas Derby -- and also won the Kentucky Derby. Smarty Jones did all that, and his total take -- including the Derby purse -- was a world-record $5,854,800.

Before the Rebel, the first race in the bonus series, Cella insured half of the $5-million with Lavin Insurance in Louisville. After Smarty Jones won the Rebel and the Arkansas Derby, Cella was convinced that the colt was good enough to win the Kentucky Derby, and he negotiated a policy with Lavin to insure the remaining $2.5 million.

Cella and Kevin S. Lavin, president of the insurance firm, said that the second policy was written Thursday. They declined to say what the premiums cost.

“I wouldn’t want to embarrass someone I’ve done business with,” Cella said.

Cella said that he had made a good-sized bet on Smarty Jones in the Derby, in an attempt to defray the cost of his premiums. Smarty Jones paid $10.20 to win.

“Let’s just say that I had that horse in my pocket,” said Cella, who wouldn’t say how much he bet.

Cella, who also races horses, said that his trainer, Ron McAnally of California, advised him after the Arkansas Derby that Smarty Jones had a good chance to win the Kentucky Derby.

“Ron said that Smarty Jones’ strong finish in the Arkansas Derby indicated that the horse would be able to run the extra eighth of a mile in Kentucky and win,” Cella said. “Any time a horse runs that last eighth in about 12 seconds, after breaking from the outside post on a muddy track, it means he’s got something left in the tank.”

Cella started negotiating the second policy with Lavin shortly after the Arkansas Derby, but they didn’t come to terms until 48 hours before the Kentucky Derby.

“Based on our expertise and experience in the racetrack- bonus business,” Lavin said, “we quickly assessed this niche market and placed the remaining $2.5 million of coverage.”

The $5 million of coverage was shared among “multiple insurance companies,” he added.

While Saturday’s payout may seem daunting, Mark Mitchell of U.S. Benefit Consultants in Atlanta said there might be $100 million in contingency insurance at any one time, most of which is never collected on. And policies like the one Oaklawn took out are usually spread among numerous syndicates so no one is responsible for more than 5% to 10% of the total.

“It’s not something that’s going to bankrupt anyone,” he said.

Cella’s family had been against offering the bonus in the first place. The idea was to ensure that the Arkansas Derby, a $1-million race, would attract top horses. John Servis, the trainer of Smarty Jones, said that the bonus was not the reason the Philadelphia Park-based colt took the obscure Arkansas route to Churchill Downs. Smarty Jones was only the fourth horse out of Arkansas to win the Kentucky Derby.

“I liked the spacing of the races there,” Servis said, “and it seemed like an easier way to get to Kentucky.”

Smarty Jones is now eligible for another $5-million bonus -- one sponsored by Visa and also insured -- which goes to a horse sweeping the Triple Crown. The next race in the series is the Preakness at Pimlico on May 15, followed by the Belmont Stakes on June 5. Should Smarty Jones win the Triple Crown, he would pass Cigar as racing’s all-time earner. Cigar’s total was $185 short of $10 million.

Racing has a history of bonuses, some of which have led to controversy. When War Emblem won the Derby in 2002, he earned a $1-million bonus from Sportsman’s Park, where he had won the Illinois Derby. Russell Reineman, who sold the horse to Ahmed bin Salman, a Saudi Arabian prince, for $900,000 after the Illinois Derby, claimed that he was owed half of the bonus.

Reineman sued, but there was an out-of-court settlement, with Reineman being paid about $300,000, plus reimbursement for his legal expenses.

In 1989, sponsors of the Canadian Triple Crown, which hadn’t been swept in 33 years, offered a $1-million bonus to any horse who won all three races.

Then horses swept the series in 1989, 1990 and 1991, each one of them earning the bonus.

The premiums reportedly escalated from $50,000 in the first year to $250,000 by the third year. After paying off three consecutive years, the insurer, the Bank of Montreal, refused the Triple Crown sponsors any more insurance. The Canadian bonus disappeared.