Insurers Fight Hollywood Claims Over “Gap Financing” for Movies

As most people with experience in the movie industry could tell you, it’s an easy way to lose a lot of money. That may happen to several insurance companies, notably France’s AXA, if they lose the lawsuits that have been filed in New York and London seeking to void coverage on a number of “gap financing” policies written over the last five or six years.

The idea is fairly simple. Making a motion picture costs a lot of money, even if it’s not “Star Wars” or “Mission Impossible”; so, producers have increasingly sought loans to cover the “gap” between the budget for the costs of production and the amount they have committed to the film, which in some cases amounts to very little. Once the film is produced and distributed, the loans are repaid.

Banks and other lenders, however, are reluctant to lend large amounts of money for films that may never find a distributor, or may flop at the box office. If this happens—and under Hollywood’s arcane accounting procedures it happens frequently—the producer can’t reimburse the amount advanced.

The solution is to insure repayment of the loan, i.e. if the producer fails to reimburse the lender because the film fails to recover its production costs, the insurer covers the lender’s loss by paying the difference between the amount lent and the amount that has been repaid.

Typically the insurance company involved assumes only part of the risk, or reinsures some of it, so there may be several insurers and reinsurers involved. AXA was one of the most active companies writing gap financing coverage, both directly and as a reinsurer.

Stephanie Binet of AXA Corporate Solutions in Paris confirmed that AXA had “probably participated in about 30 such deals over the last five or six years,” but gave no exact figure.

“It was a very specific type of insurance and we had one broker who was responsible for it, starting around the end of 1993 or early 1994,” Binet said. “We’re no longer doing business with them, and we stopped writing any of this kind of insurance in early 1999.”

Binet declined to discuss details concerning the lawsuits that AXA has brought against several Hollywood production companies, individual producers and the banks and brokers involved—notably Chase Manhattan and Stirling Cooke Brown—saying only that each case was different and involved different people.

However, Binet did indicate that the one issue central to all of them were the circumstances that prevailed at the time the policies were issued.

“After we examined these contracts, we believe that misleading information was presented at the time we signed them, and that a lot of important facts weren’t disclosed,” she said.

AXA’s position is that it would not have provided coverage for the gap financing loans to the banks and the producers had they fully disclosed all the facts concerning the production companies involved and the films they intended to produce. For this reason AXA has so far refused to make payments on questionable policies and has submitted the matter to the courts for adjudication.

Binet stressed that where there was no question of fraud, the company has covered the losses without exception. “We will continue to stand behind our contractual obligations,” she said. “If we owe, we’ll pay, but as the entire market knows, in the cases we are contesting it isn’t that simple.”

Asked about reported loss estimates in the $1.4 billion to $1.5 billion range, Binet indicated that this figure might represent total potential losses for all the insurers involved in gap financing coverage, but said, “the total limits on AXA’s business is less than $600 million.”

She indicated that this figure represents a maximum loss on all the policies, and as many of the films involved may in fact recover some or all of the costs, or the contracts may be declared void, it was probably a much higher estimate than would eventually occur. “The total sum isn’t by any means going to be the total loss,” Binet said.

Claims and counterclaims have been filed in both the U.S. and the U.K., where AXA also wrote gap financing coverage. In reply to AXA’s lawsuits, Chase Manhattan has demanded that the contracts in question be honored, and the validity of the fraud allegations are now up to a judge to decide, unless a settlement is reached before the cases go to trial.

Whatever happens, this provides a salutary lesson to insurance companies and other businesses that are tempted to participate in Hollywood ventures, and might be especially instructive for the French. After Credit Lyonnais’ debacle over MGM, and AXA’s current problems with gap financing, one wonders what the future holds in store for Vivendi after its takeover of Seagram and Universal Studios.