MGM Grand Set to Battle Its Insurers : Case Expected to Last 8 to 10 Months, Cost $342,000 a Day to Try

The lawsuit’s principal protagonists describe the case as “simple,” “straightforward,” and even “frivolous.”

And yet the case involves so many lawyers--49 of them--that a special courtroom has been built in an 11,000-square-foot room next to the arena where the University of Nevada at Las Vegas plays basketball. There are 8 million documents. And the case, which is scheduled to start Tuesday, will take 8 to 10 months to try at an estimated daily cost (including fees for all those lawyers) of $342,000.

At issue is who will pay the claims of victims of the Nov. 21, 1980, fire at MGM Grand Hotel, in which 85 people were killed and 591 were injured. The fire was blamed on an electrical short in a hotel restaurant.

Forced to Borrow

MGM Grand and various contractors in 1983 settled a lawsuit brought by victims of the blaze and their families. The settlement, worked out by U.S. Dist. Court Judge Louis Bechtle, called for payment of $140 million to 1,357 people. MGM Grand’s portion of the total was $75 million.

Insurers refused to pay MGM that amount, and the company was forced to borrow the money in order to complete payment.

MGM, accusing its insurers of breach of contract and “bad faith,” is seeking $117 million to cover the settlement amount plus attorney fees and interest.

In a related suit to be tried simultaneously, the insurers are suing Del E. Webb Corp., which was renovating offices at the MGM Grand Hotel and building the new Tracy Tower (not involved in the fire) at the time the fire occurred. The insurers claim Webb’s $151 million in liability insurance should have been used by MGM before it filed any claims against them.

The case is novel not only for its size but because it is the first involving retroactive insurance, in which insurers charge high premiums to provide insurance after a disaster but before settlement of all claims against the insured. Insurers can profit if payments to victims are sufficiently low and there is enough time to benefit from investing the premiums.

MGM argues that the insurance companies, having lost a gamble that it would take years to resolve the fire victims’ lawsuits, are trying to dodge payments.

Insurers will try to persuade the eight jurors that MGM, once it had lined up the retroactive insurance, settled for too much money.

At the time of the fire, MGM had only $30 million in liability insurance, which was quickly exhausted by early claims from victims. So the hotel bought $170 million in retroactive insurance, at a price of $35 million in premiums. The insurance came in four “layers.”

Under the first layer, Union International Insurance Co. agreed, for a $25-million premium, to provide $35 million coverage for any claims that exceeded MGM’s original $30 million insurance. Union and its parent company, Frank B. Hall & Co., the broker which arranged all the retroactive insurance, are the principal defendants in MGM’s suit. Union is also the principal plaintiff against Del Webb.

Other Layers

Under the second layer, 12 other insurers agreed, for $7 million in premiums, to pay another $35 million if claims exceeded the Union coverage.

In the third layer, eight insurers collected about $2 million in premiums for $25 million worth of insurance if claims exceeded the prior coverage.

In the fourth layer, 20 more insurers charged about $1 million in premiums for $75 million of coverage if claims reached above $125 million. Arguing that MGM’s liability costs have not gone that high, they have asked to be excused from the lawsuit.

After buying the four-layer retroactive insurance, MGM agreed to the $140-million settlement of the victims claims, surprising those who expected the litigation to drag on for many more years.

Union paid about $11 million of its retroactive coverage, before cutting off payments, claiming MGM agreed to pay too much money and also agreed to pay punitive damages in settling the fire suit. (MGM’s policy with Union excludes payment for punitive damages.)

Wrong Guess?

MGM lawyers William M. Shernoff and Patricia L. Glaser contend that those arguments are only a smoke screen to conceal Union’s real reason for halting payments--that MGM settled its case more quickly than Union had expected. Union had few assets of its own, they said, so it reinsured the $35-million coverage it had promised for a premium of $20.2 million, banking the rest. The underwriter’s contract provided for no repayment, however, until 1984 and spread total coverage through 1991, making it impossible for Union to pay MGM’s settlement costs in January, 1983.

“They guessed wrong on the amount and on the time,” said Shernoff, who has built a reputation for winning multimillion-dollar bad faith insurance verdicts in Los Angeles. “In Los Angeles, it would have taken five years to get to court. But Judge Bechtle resolved this in two.”

Describing MGM’s suit as “very straightforward,” Glaser said: “We just want to be paid.”

“My opening line to the jury will be,” added Shernoff, “that this is a very simple case and all those lawyers out there are going to try to tell you why it’s complicated. The insured paid a very large premium for insurance, entered into a settlement that was judged to be fair, reasonable and for only compensatory damages by the federal court, and the insurance companies are delaying payment because it is to their advantage to do so and have come up with ridiculous excuses not to pay, including that victims got too much money and got punitive damages.”

Calls It Fiction

Marshall Morgan, who represents Union and Frank B. Hall and considers his an “easy” defense, insists payments were stopped solely because MGM paid too much and paid punitive damages in the settlement. Although Judge Bechtle specifically stated that the settlement did not include punitive damages, Morgan is certain that it did, and that under its policy Union need not pay them.

“There is a fiction that is indulged in by all courts, all plaintiffs and all defendants, that punitive damages are waived in settling a complaint,” Morgan said. “They do that because punitive damages are taxable to the plaintiff, and they don’t want him to have to pay taxes on the settlement. But it is a fiction that the settlement does not contain punitive damages.”

He said the $75 million paid by MGM in the settlement to victims was “astronomical,” further indicating it included punitive damages. He said Union and Hall calculate that the total payment from all defendants to all victims should be under $60 million and that MGM’s share should barely touch Union’s coverage.

Morgan strongly denied MGM’s accusations that the insurer is purposely delaying payments in order to profit from premiums or collect underwriters’ payments.

As for Del E. Webb Corp., its attorney Nowland Hong characterized the insurers’ lawsuit against his client as “pretty frivolous.”

“I think we are here because Del Webb had very adequate insurance, and Union saw another deep pocket to go after.”

MGM, he pointed out, never sued Del Webb in the fire litigation because it determined the contractor had no responsibility for the fire. A few victims subsequently did sue Webb along with other contractors, and Union argues MGM should have joined them.

Litigants Assessed

After deciding that “there is not a courtroom in the free world large enough to hold this case,” Nevada District Judge Paul Goldman, 50, moved it into the one-year-old Thomas and Mack Center on the campus of the University of Nevada at Las Vegas.

Goldman also has assessed the more than 50 litigants some $500,000 so far to pay for 10 months rent, court-like furniture, a sound system, and miscellaneous continuing expenses for copying, coffee and doughnuts, and the salaries of Goldman’s special master, attorney Michael Cherry , and Cherry’s half-dozen aides--including a former Las Vegas dancer.

When Judge Goldman looks out on the makeshift courtroom Tuesday, he will have ceiling-hung cardboard signs to remind him of the lawyers’ names.

Keeping order could be tough. “He needs a whip and a chair,” quipped Cherry of the mild-mannered judge who lunches in his spartan makeshift office on French fries and peanut butter and jelly sandwiches.

“This guy has to have nerves of steel.”