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.

Question

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.

Answer 1

An insurance company would be willing to issue insurance to MGM under these conditions because of several factors:

1. Retroactive coverage: The insurance policy was retroactive to November 1, 2000, which means it covered any claims that may arise from incidents that occurred before the fire in 2009. This is an important feature because it protects MGM from potential legal actions related to incidents that may have taken place in the past.

2. Higher liability coverage: The hotel purchased an additional $170 million of liability coverage, increasing their total coverage to $200 million. This higher coverage amount ensures that the insurance company has a substantial amount of money available to pay out any claims or damages resulting from future incidents.

3. Premium payment: MGM paid a premium of $37.5 million for the additional coverage. This premium represents the insurance company's income and is calculated based on the risk associated with covering MGM. If the insurance company believes that the premium adequately reflects the risk of insuring MGM, they would be willing to issue the policy.

4. Consideration of risk factors: Although MGM had previously experienced a significant fire incident, the insurance company likely considered other risk factors. They may have assessed MGM's fire prevention and safety measures, reviewed their financial stability, or considered any upgrades or improvements made to the hotel after the fire. If these factors indicated a reduced risk or a commitment to safety, the insurance company might have been more willing to issue the insurance policy.

Ultimately, the insurance company's decision to issue insurance to MGM under these conditions is based on their assessment of the risks involved and their confidence in MGM's ability to mitigate those risks. The retroactive coverage, higher liability limits, premium payment, and other risk factors all contribute to the overall decision.