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 a few factors:
1. Risk Assessment: Insurance companies assess the risk associated with providing coverage to a particular entity. They analyze various factors such as the nature of the business, past claims history, safety measures in place, and the likelihood of future claims. In this case, the insurance company likely evaluated MGM's risk profile and determined that their risk was acceptable.
2. Retroactive Coverage: The fact that the insurance coverage was retroactive to November 1, 2000, means that the policy would cover any claims arising from incidents that occurred before the fire. Retroactive coverage is sometimes offered as a way to protect against unknown liabilities or potential claims that may arise in the future. The insurance company may have considered the extended coverage period as an opportunity to collect premiums for prior claims.
3. Increase in Liability Coverage: MGM purchased an additional $170 million of liability coverage after the fire. This signifies that the hotel recognized the need for higher liability limits to protect against potential claims. The insurance company may have seen this as a positive sign that MGM was taking proactive steps to address potential risks and mitigate future losses.
4. Premium Payment: The premium charged for the retroactive coverage was $37.5 million. This amount would have been determined based on the assessed risk, coverage limits, and the perceived likelihood of future claims. The insurance company likely calculated that the premium amount adequately compensated for the potential risk and coverage provided.
Overall, the insurance company's decision to issue insurance to MGM under these conditions would have been based on their assessment of the hotel's risk profile, the additional liability coverage purchased, the retroactive coverage, and the premium payment offered.