Hollywood and the Insurance Industry
Entertainment includes a number of related activities: motion
pictures low budget to high budgets, TV show, TV pilots, Animations,
musical performances, stage plays, radio, cruise ship entertainment,
sporting events, beauty contests and . All can be insured, but Films
remain special, perhaps due to their legendary ability to fascinate the
public and generate hug income.
Somewhere over the rainbow
Whatever the reason, they also fascinate the insurance industry. According
to the Insurance Information Network of California (IINC), film
production-related premiums exceeded $100 million in 1998, the majority
for feature films. Although it may qualify as a "niche
business," the major players aren't small-they include AIG, Chubb,
CNA, Fireman's Fund and St. Paul among the most prominent, as well as
Lloyd's, who once famously insured Betty Grable's legs.
The IINC describes four basic film insurance products
They're designed to "protect filmmakers from possible business
interruption from everything from weather-related filming delays to the
loss of a cast member or other film personnel."
In a bulletin issued last year it described them as follows:
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Cast insurance covers any additional costs that can arise if a
production loses a cast member, director or any personnel and often
represent the largest film insurance claims. In March of 1994, the
producers of "Wagons East" collected $14.5 million when
actor John Candy died of heart failure with 20 percent of production
remaining.
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Errors and omissions policies protect production companies from
lawsuits involving violation of personal rights, libel or slander.
These policies usually require filmmakers to consult with attorneys
prior to a film's release to check for anything that might spur a
lawsuit.
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General production insurance packages provide the standard
insurance needed by any business, such as worker's compensation,
general liability and commercial auto insurance. It also includes
costs for delays and re-shooting due to inclement weather, equipment
failure and set damage.
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Completion bonding guarantees that a film will be finished. Without
completion bonds, some of the Academy-Award nominated independent
films such as "Cider House Rules, "The English Patient"
and "Leaving Las Vegas" might never have made it to Oscar
night. Without the backing of a major studio, independent producers
need the guarantee that they have the financial means to complete a
film.
The first three types are analogous to insurance policies in other
fields. Cast insurance is a form of "key man" life, coupled with
business interruption protection. E&O coverage is standard in many
professions, as are commercial policies. Delays, however, take on special
importance when they can exceed $300,000 a day.
The name's 'Bonds,' 'Completion Bonds'
Completion bonding and its offshoots, gap financing and income stream
securitization guarantees, are more complicated, and therefore more likely
to lead to disputes and litigation. AXA withdrew from the field entirely
in 1999, and AIG is currently embroiled in a dispute with Credit Suisse
First Boston over whether it issued an insurance policy, or an
unconditional financial guarantee covering film productions.
"In the simplest case, a completion guarantee or bond assures
whoever is financing the production, whether it's a bank or an individual,
that the film will be made and delivered within the time period specified;
that it won't cost them any more than the original investment; and that in
a worst case scenario-production is shut down-it's a guarantee that they
can get their money back," said Steve Mangel, the head of
International Film Guarantors (IFG) in Hollywood.
IFG is a very specialized type of insurance broker, which arranges
completion bonds. It's a limited partnership between Near North National
Group and Fireman's Fund, and, as Mangel indicated, "you can't just
write a policy and sit back and hope there isn't a loss. A completion
guarantee gives you very broad powers, and an obligation to mitigate. You
can even take over the production, but it's very rare to do it."
IFG specialists are experienced in every aspect of movie making and
follow a film's progress from day one. "That way," Mangel
continued, "if there's anything off-kilter we can bring people
together and try to work out the problems. Knowing what goes on, on a
daily basis, is the key to monitoring. You have to break down all the
components in the schedule."
A completion bond is only issued at the request of the third party
investor, and until fairly recently, mainly for independent productions,
according to Mangel. Typically, the producer or his agents will
"pre-sell" the rights to distribute the film before it has been
made. When enough of these contracts have been concluded to make the
project viable, the producer seeks financing from banks, movie studios and
private investors.
The investors contract with a broker such as IFG to guarantee that the
film will be completed. While the producer may have obtained distribution
contracts, no guarantee is given that the film will actually be
distributed, sold, or make any money. It simply assures investors they'll
get their money back, or that the guarantor will pay for cost overruns,
which are recoverable by the guarantor after the principal amount has been
repaid.
Complicated productions may have a number of financing entities,
involve more than one film, and a number of insurers and reinsurers who
share the risks by splitting the coverage or taking different layers of
exposure. "IFG acts as an agent for Fireman's Fund," Mangel
said, "so we usually place coverage with them, but some projects may
have their own agents or companies, in which case we work with them."
It's a highly specialized market. Arcel, Film Finances, which is part
of Lloyd's, Cinema Completions, which is controlled by CNA and Motion
Picture Bonding in London, were some of the few that Mangel named.
IFG normally writes more than 40 guarantees a year for up to $100
million. It's written more than $2 billion for such films as "Braveheart,"
"Evita," "Four Weddings and a Funeral,"
"Fargo," "Lara Croft-Tomb Raider," "The
Score," and Woody Allen's "The Curse of the Jade Scorpion."
It's currently awaiting post-production and/or the release of the first
episode of "The Lord of the Rings," Robert Altman's "Gosford
Park" and Harrison Ford's latest film, "We Were Soldiers Once
and Young."
Completion bonding is a mature industry. Most of the essential contract
wording has long been established, and services like IFG's are an integral
part of filmmaking. There are still changes going on, however. "Until
five or six years ago most studio projects were 'self-bonded,'"
Mangel said, "but recently there have been more co-productions, where
guarantees are required. There's also a desire to take cash investments
off the balance sheet by borrowing the money to finance a film rather than
advancing it directly, which increases the demand for policies
guaranteeing completion and delivery." Nevertheless, they're all
essentially classic film guarantees.
©2001 by Wells Publishing, Inc.
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