November 21, 2009, was the day of a tragic fire in the MGM Grand Hotel in Las Vegas. At the time of the fire, the hotel had only $30 million of liability insurance. One month after the fire, the hotel bought an extra $170 million of liability coverage for a premium of $37.5 million, retroactive to November 1, 2000 (before fire) Why would an insurance company be willing to issue insurance to MGM under these conditions.
To understand why an insurance company would be willing to issue insurance to MGM under these conditions, we need to consider several factors:
1. Risk assessment: Insurance companies have a process of assessing the risk associated with insuring a particular entity. This includes evaluating the likelihood of an event, such as a fire, and the potential financial losses that could result from it. While the MGM Grand Hotel had experienced a tragic fire in the past, insurance companies would assess the hotel's fire safety measures, maintenance practices, and overall risk management strategies to determine the likelihood of another fire occurring.
2. Financial stability: Insurance companies consider the financial stability of the insured party before issuing insurance coverage. Even though MGM had only $30 million of liability insurance at the time of the fire, insurance companies would evaluate the hotel's financial resources, assets, and ability to pay premiums. The fact that MGM was able to purchase an additional $170 million of liability coverage suggests that the insurance company was confident in the hotel's financial ability to meet its insurance obligations.
3. Premiums: The amount of insurance coverage purchased and the premium paid are closely linked. In this case, MGM purchased an additional $170 million of liability coverage for a premium of $37.5 million. The premium amount reflects the assessed risk and serves as compensation to the insurance company for taking on that risk. If the insurance company believed that the premium adequately compensated for the potential losses, they may have been willing to issue the insurance coverage.
4. Retroactive coverage: The insurance coverage purchased by MGM was retroactive to November 1, 2000, which means it applied to incidents that occurred before the fire in November 2009. This type of coverage implies that the insurance company is willing to provide protection for previous events, possibly because they believe that the risk associated with those events has been adequately addressed or mitigated.
In summary, the insurance company may have been willing to issue insurance to MGM under these conditions based on their assessment of the hotel's risk profile, financial stability, the adequacy of premiums, and the availability of retroactive coverage.