OK, this was discussed in passing here, but I found another article on it (from The Times) that's pretty clear cut, so I thought it deserved it's own post:

Luol Deng, the Chicago Bulls forward, will not be permitted to play for Great Britain in next month's European Championship qualifying campaign after an insurance company refused to provide adequate cover on his new £37.8million contract. The news will come as a devastating blow to the Britain team, who were considered capable of qualifying for next year's finals from a group containing Israel, Bosnia and the Czech Republic, as they continue their preparations for the 2012 Olympic Games in London.

Deng, 23, signed a guaranteed, six-year £37.8 million contract with the Bulls two weeks ago after passing a number of medical tests. But the NBA's New York-based insurance company has refused to cover him, citing an MRI scan from last November of a lower-back injury. Deng, who was born in Sudan and grew up in South London, missed three games because of the injury and, although the Bulls were happy to give Deng a new contract, the insurer claims that medical evidence suggests that the injury could be a long-term problem.

Under an arrangement with Fiba, world basketball's governing body, the NBA is obliged to release any player who wishes to play for his national team, but it has to do so only if adequate insurance is in place. Although the insurer has issued a policy, it does not cover potential back injury, effectively rendering it useless.

The wording here seems pretty clear to me.  They're talking about the insurance in the context of the contract he signed with the Bulls, not some special thing for the tournament.  Notice also that it says "the insurer has issued a policy". That makes sense if we're talking about a policy on Deng's NBA contract, since the policy would presumably cover the contract in the event of other (non-back related) injuries.  It doesn't make sense if it's just a contract covering his play on the GB team.  Because if that were the case, the policy wouldn't have actually been issued in the first place since it doesn't meet the requirements to allow him to play.

Because the contract is partially uninsured, the Bulls can say he can't play unless the Brits can arrange their own insurance policy, which apparently they're having trouble doing (just like Curry with his heart, etc).

In short, I think the jist is

1. The insurers saw something on the MRI of his back they really didn't like.

2. The Bulls didn't care and signed him to an uninsured (on his back) contract.