Lights! Camera! Coverage?

Film and broadcast production has become a big industry in Canada. Total production activity in Canada accounts for over $5 billion, with the film industry employing more than 130,000 people. While large U.S. productions often garner the lion’s share of media attention, foreign location shooting while strong, is still outpaced by Canadian certified (i.e. Canadian “content”) productions. Canada’s domestic film industry accounts for more than $2 billion in production activity, while foreign location shooting totals $1.8 billion. Non-certified productions and broadcaster inhouse production represents another $1.2 billion.

LUCRATIVE BUSINESS

Film and entertainment is also a potentially lucrative business for Canadian insurance companies and brokers, although only a few major players have staked their place at the front of the line. The main insurers in this business are Chubb, Lloyd’s of London and Temple Insurance Co. (a subsidiary of Munich Re). There are only a handful of brokers participating in this market, with the big names being Aon, B.F. Lorenzetti, Jones Brown and Marsh. There are also specialty managing general agencies (MGAs) and underwriting managers for film insurance, such as Premiere Insurance Underwriting Services Inc.

Like most niche markets, film and movie production offers substantial business, estimated by some sources at $30-$40 million in annual premium volume. But, it also requires careful underwriting and opens up exposures to potentially hefty losses.

“We cover everything from the weird and wonderful to the mundane,” says Kirk Thompson, managing partner of the entertainment division at Jones Brown Insurance Brokers and Consultants. “One day we may be insuring a cooking show on a studio set, the next we could be looking at a war or action movie. We have insured films shot in locations ranging from underwater to space.”

Ironically, while the big U.S. studio feature films shot on location in Canada create media and public attention, they do not typically involve domestic insurers and brokers. Major American production companies, such as Disney, Sony, Universal, Dreamworks, Time Warner, MGM and Miramax, buy insurance as part of global programs and may only counter-sign with local brokers. U.S.-based Fireman’s Fund, part of the Allianz Insurance Group, for example, is the world’s single largest insurer of Hollywood productions. Among the many films insured by Fireman’s Fund last year were the Oscar-winning “Lord of the Rings” and “Cold Mountain”.

Most insurers in Canada tend to cover domestic production companies for filming in Canada and around the world. British Columbia, Ontario and Quebec are the main regions of production activity, combining just over $4.5 billion in total production output. Atlantic Canada and the Prairies together account for about $500 million in production activity. Buoyed by internationally successful events like the recently held 24th annual Toronto International Film Festival, the domestic film industry has evolved to become an important part of the Canadian economy, according to several sources.

“The Canadian industry has built up a solid infrastructure over the past 25 years,” says Mark Teitelbaum, president of Premiere Insurance Underwriting Services Inc., an MGA that started in 1999. “With the maturation and professionalism of the domestic film industry, I think there was a growing realization from producers and others that a more Canadian approach to underwriting was required.”

CANADIAN EXPERIENCE

Insurers in Canada have, for better or worse, followed the fortunes of the film production industry. The sector has experienced overall stable growth throughout the past two decades: mainly attributable to the relatively low Canadian currency attracting foreign location shooting, tax incentives from federal and provincial governments and the presence of well-trained and competitive production crews. Provincial fiscal incentives, such as service production tax credits, have helped stimulate production activity in Canada’s regions.

From an “activity high” throughout the 1990s and into the early 2000s, the sector has hit some distinct lows over the past three years, with flat revenues and diminished production. First, the events of 9/11, and the resulting impact on economic indicators such as consumer confidence and advertising spending, have had negative consequences for the Canadian production sector. The terrorist attacks had an immediate effect on the media and entertainment industries, which are driven largely by advertising revenues.

Last year, the outbreak of “Severe Acute Respiratory Syndrome” (SARS) curtailed production shooting, particularly in Toronto. Several films were relocated to other cities, while production activity declined in Ontario by 40%, according to one producer.

However, one of the most influential factors affecting production activity was financial – a healthy Canadian dollar. Our stronger currency has made it less advantageous for American production studios to shoot films here. “When the dollar was low, the U.S. production crews were here in droves,” says Jean Warren, an underwriting manager who works on behalf of Lloyd’s at B.F. Lorenzetti in Montreal. “I have noticed a difference recently.”

Throw in the U.S backlash over so-called “runaway productions” – movies that have moved from major Hollywood studios and California to Canada – and you have an industry that has experienced some dramatic twists and turns in recent years. “It has been pretty flat this year so far,” says Joanne Camacho, a vice president with B.F. Lorenzetti, & Assoc. Inc., who heads up the brokerage’s entertainment and sports division.

MARKET PRICING

Much of this stalled production activity has taken place against the backdrop of a hard insurance market. Sources say the pricing corrections, coverage restrictions and capacity crunch of the general commercial market were reflected in the film insurance sector as well. “There was a re-underwriting of the book and some fairly dramatic price increases, mostly in line with what was happening in the general market,” says Thompson.

Camacho says the hard market re-emphasized the need for specialists and expertise in the film insurance sector. “About four years ago, rates were at an all-time low and some companies thought they could move into this line of business,” she says. “They saw the premiums but they didn’t fully appreciate the exposures. Some offered broad coverage and lost big time. The problem for us – and clients – is that this can be very disruptive.”

Susan MacEachern, a vice president with Chubb Insurance Co., and Canadian zone manager for its custom marketing division, says capacity has become more of an issue for film producers. “There are not a lot of companies that can put together coverage for a movie with a budget of $20-$30 million,” she observes.

Capacity is an important issue because of the rising budgets for today’s domestic films. Both Warren and MacEachern say they have seen the average dollars spent on Canadian productions increase from $2-$3 million to $6-$8 million, with budgets over $10 million not uncommon. Higher film budgets translate into the need for more careful underwriting, according to sources.

CLAIM EXPOSURE

Insurers offer standard packages to film production companies that cover first-party property (sets, props, wardrobe, and buildings), liability and errors and omissions (libel, slander, copyright infringement and intellectual property). While the policies tend to be uniform, each risk is underwritten on an individual basis and may require some modifications or special coverage.

“We have to underwrite this on a case-by-case basis because the film projects can be so different,” says MacEachern, “We may look at higher limits or deductibles for things like cast insurance when big-name artists are involved.”

Camacho says brokers walk a fine line between insurance company underwriting requirements and the entertainment focus of film directors. “This is a creative business,” she says. “A director or script writer may want to do a dangerous stunt, such as a car chase with a low-flying helicopter in an urban setting. An insurer’s first reaction may be simply, ‘no way’. But often as a broker you can work out a solution.”

“The two things producers worry about most are first, getting the film production done and second, getting it done on time,” says Teitelbaum. “We are there to take a lot of the hassles and headaches away from producers, and I think movie people have finally come to understand and appreciate the role of insurance.” Teitelbaum adds some insurers have gone beyond standard policies to offer specialty coverages, such as family bereavement. This policy insures any delays in shooting caused by a cast member’s absence due to family-related illness or death.

The types of claims insurers are exposed to in the film industry can vary from physical property to intellectual property. While companies and brokers say there has not been any spike in claims activity, they note carriers have to be cautious about potential big-ticket losses. These claims can involve things such as injured cast members delaying production shoots (“holding losses”), property damage related to film negatives or lab processing (“faulty losses”) and lawsuits related to defamation, libel or slander, especially in productions like documentaries or “docu-dramas”.

“In this industry, the concern is not frequency, but severity,” says Teitelbaum. “Yes, there may be some damage to equipment, but the real concern is the big loss. We could be putting $20 million of film negatives onto an airplane for processing at a lab in London. Sometimes, it’s hard to think about the potential size of the loss.”

An example of a severity loss occurred in 1996 during filming of “The Long Kiss Goodnight,” a box-office flop starring actress Geena Davis, which at the time, with a budget of $65 million-plus, was the most expensive movie ever filmed in Canada. What added to the production’s budget calamities was a $5 million fire that destroyed the 127-year-old Muskoka landmark Windermere House. The resort, which was used as a set during the film’s shooting, burned down in February because of a movie light, according to the Fire Marshal’s office.

Another recent claims example related to cast insurance, or a “holding loss,” occurred when actress Halle Berry broke her arm in May, 2003 on the Montreal set of the film “Gothika.” Berry, who starred as a criminal psychologist in the supernatural thriller, was injured while shooting a “physically demanding scene,” according to the film’s spokesperson. The movie’s producers, Robert Zemeckis and Joel Silver, were forced to shut down filming to wait for Berry’s recovery and return to the set. Crews on these types of sets can cost thousands of dollars per day, which insurance covers. While producers can arrange to “shoot around” a star and use body doubles, substantial costs can accumulate when a cast member is injured.

More tragically, two young Montreal actors were killed last year in a car accident while filming “15/LOVE” – a Canada/France drama co-production that was airing as a series on YTV. Jaclyn Linetsky and Vadim Schneider, both 17 years old, died in September 2003 on their way to the set in St. Csaire, Quebec. Shooting for the $11.6 million series was delayed, and finally finished last December.

E&O DIFFERENCE

Errors and omissions insurance for film and movie companies is one area that Teitelbaum says clearly separates Canada from the U.S. Issues such as defamation, copyright infringement and intellectual property have played out in the litigious American environment, especially in California. Several lawsuits against film producers have made E&O insurance “virtually unavailable, except at extreme prices” in the U.S., says Teitelbaum.

Teitelbaum says Canadian insurers have managed to avoid the U.S.’s E&O situation “by doing the work upfront to clear and vet scripts”. Many policies today require producers to work with “clearance lawyers” who specialize in the entertainment business. The result has been lower loss ratios and little activity in the E&O claims field. “This is a good news story for this industry,” Teitelbaum says. “The approach has worked and created a more stable environment for our film and production industry.”

Stability and increased production activity are what domestic producers are hoping for in the months and years ahead. And some insurance representatives are seeing positive signs. “I think it’s turning around,” says Thompson. “We have been very busy in the first half of this year and it is already looking better than last year.”

Teitelbaum says he would like to see an even greater emphasis on the domestic film industry and less concern about the “red-herring” of runaway productions and U.S. foreign location shooting. “The fact of the matter is that other American states, such as Louisiana, have copied some provincial tax incentive programs, and are aggressively marketing locations,” he says. “Other countries, such as Poland, the Czech Republic, Australia and South Africa, are doing exactly the same thing.”

One of the reasons Teitelbaum says he saw an opportunity to start an MGA was the gap in “made-in Canada” insurance solutions for domestic producers. “Certainly what happens in the U.S influences us, but we have a different situation and a different industry here,” he notes. “The question is, are we going far enough to meet the needs of our film producers? And are we able to offer a product at appropriate prices and with appropriate deductibles to serve this industry?”