Pinnacle Sues Insurance COs Over Katrina Payments

The casino hotel has been closed indefinitely due to damage sustained during Hurricane Katrina.

At stake is nearly $250 million, which Pinnacle believes it is owed based on policies the company held with Allianz Global Risks US Insurance Company, Arch Specialty Insurance Company and RSUI Indemnity Company. These companies provide $300 million in total coverage to Pinnacle. Other companies provide $100 million in other insurance including flood coverage.

While the insurance companies argue the damage was caused by flooding, which would make them not liable, Pinnacle maintains the damage was covered by a “weather catastrophe occurrence.”

According to the 13-page lawsuit filed on August 1st in the United States District Court for the District of Nevada, "Defendants were fully aware that hurricanes cause storm surge and flood." The lawsuit goes on to claim the insurance companies created erroneous information to avoid having to pay the claim.

However, the casino was traded to Harrah’s Entertainment this past May for $25 million in cash and a pair of Lake Charles, LA, riverboat casinos. According to a statement made by Pinnacle Chairman & CEO Dan Lee, its president Wade Hundley, CFO Steve Capp, and others, the lawsuit alleges the insurance carriers have also “improperly asserted” they bare no responsibility for the “continued business interruption loss at Casino Magic Biloxi incurred after that sale; and that Pinnacle is not entitled to designate its St. Louis County project as a replacement for Casino Magic Biloxi.”

Pinnacle wants to courts to dictate that the company is permitted to receive continued payments on the Casino Magic Property and that the intended St. Louis development is entitled under written policies.

Though the company has been making deals and announcing major new projects throughout the year, the growth mode has not come without some significant setbacks.

Last spring, company executives thought they had secured a deal to purchase rival Aztar with a $38 per share takeover agreement. However, a bidding war erupted among other companies that ended with the Aztar deal getting cancelled. Instead, Aztar sold to Columbia Entertainment at $54 per share in a deal valued at $2.75 billion including the assumption of about $676 million in debt. Pinnacle has been paid nearly $45 million by Aztar because of the canceled deal but lost out on the Tropicana hotels in Las Vegas and Atlantic City, among other holdings.




More recently, the company had vied for permission to open a casino in Antofagasta, Chile. On July 13 the Chilean government selected the family owned Enjoy group instead. A decision on another property in Rancagua will be determined at a later date.

Pinnacle also posted disappointing second quarter financial results this week earning $46 million, ($0.93 per share) versus a loss of $4.2 million ($0.10 per share) in the second quarter 2005.

"We\'re pleased with our results for the second quarter, which were driven by continued strong results at Boomtown New Orleans and solid business levels at L'Auberge du Lac in Lake Charles, Louisiana," said Daniel R. Lee, Pinnacle's Chairman and Chief Executive Officer. "

While he may be pleased with the results, investors are losing confidence. The stock price has dropped precipitously during the last four weeks, shedding nearly 19 percent of its value to $26.43 on August 3rd.  The stock  has wildly fluctuated in value during the last year trading between $16 and $32.

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