By DOUGLAS TURK, CEO of Aon/Albert G. Ruben; and TEKLA MORGAN, vice president of Aon/Albert G. Ruben
Over the last several years, Hollywood has experienced an acceleration in the use of digital technology across all aspects of production, post-production, delivery and exhibition.
Now is the time to not only define many of the challenges and risks presented by this approach for the creative, economic and production areas, but determine how these exposures can be addressed through innovative risk transfer, risk control and financial products.
THE CURRENT RISK TRANSFER MODEL
In general, standard film and television production package policies have evolved very little over the past 20 years. Many of the forms currently in use date back to the early 90s. Today, these film production package policies typically include coverage for cast; props, sets and wardrobe; miscellaneous equipment; extra expense; third-party property damage; negative; and faulty equipment, stock and processing.
It is arguable that the existing policies cover digital production, and insurers tend to agree that the intent of the film production package has not changed: Its purpose is to provide coverage for loss due to specified perils up until the time that all of the costs, performances and activities necessary to create finished photographed material in a single element (known in the industry as the negative) from which copies of the film can be reproduced.
However, if there is no negative, the industry no longer needs negative coverage but something that more accurately describes and captures the essence of what is covered (or not) from appropriate perils and causes of loss.
In the not-so-distant future, it is entirely possible there will be no film and, therefore, no negative because the entire process will be one of digital image capture, digital processing, and digital storage, distribution and exhibition. This is already the case with some film shorts and low-budget productions.
NEW RISK RATING AND PRICING
Digital filmmaking redraws the risk curve and blurs the line between the periods of principal photography and post-production, which have been the traditional basis of risk rating and pricing for film production insurance.
Pricing for film production package coverage has historically been calculated by applying a rate against the net insurable cost, which typically contemplates all costs incurred during principal photography and which excludes post-production costs and the acquisition costs for literary rights and other intangibles.
Some of the largest, historical film production losses have involved the death, disability or sickness of principal cast, without whom production was necessarily either delayed or abandoned. Consequently, the rate attributable to the cast portion of the production package has traditionally been proportionately very high--frequently nearly half of the overall rate for the package. And yet, as technology has evolved and improved, the loss of the physical presence or availability of cast has been offset by the ability to create the illusion that they are still there.
Similarly, scenes of burning buildings, explosions and epic battles are now frequently created digitally, reducing the probability that adjacent sets and "real" buildings will be damaged or destroyed, historically a common cause of large losses.
The overall effect of these emerging technologies has been to shift risk from the period of live-action principal photography, in which "real" fire, explosions, battles and stunts are performed and captured on film, to what has traditionally been referred to as post-production, the period after filming in which captured images are enhanced, manipulated and edited via computer into the final version of the film in controlled, office-like settings.
Insurers are beginning to recognize that the line between principal and post-production activities has blurred, and some policies now contemplate simultaneous filming and post-production activities. Coverage from some insurers can now routinely be obtained for loss or damage to any medium or device used to record or store sounds or images, and coverage is sometimes available for damage to media from X-rays, magnetic fields, malicious computer programming and temperature extremes.
The next steps will involve a re-allocation and reconsideration of rate and risk. Production clients require the most comprehensive coverage at the most effective cost, while insurers must determine the actual risks and likelihood of loss. An industrywide evaluation of coverage, current rating methodologies and pricing is required to address the current state of digital production.
THE 3-D SURGE
The unprecedented success of Avatar convinced Hollywood that 3-D films can be extraordinarily profitable. Many films which were already greenlit as 2-D projects have recently been converted to 3-D before or after completion. Typically, standard film production coverage ends when a duplicate or protection print is obtained. Therefore, extended coverage must be available to meet the possibility that post-completion 3-D conversion may occur. This new coverage should be available as an extension to the customary film production coverages, and as a stand-alone for those classics which may now be remastered and released in the 3-D format.
Some form of data migration coverage will also be well received. As technology continues to advance, digital data must be systematically retrieved and migrated from old forms of storage to new forms. Coverage for losses incurred during and due to specific perils associated with such migration activities would be welcome, and as the move to digital archiving of motion pictures gains momentum, the need to insure against specific and related archival perils will become apparent.
To the extent that the migration (and possibly archiving) is outsourced, then commercial insurers may need to address the care, custody and control issues, and determine if and how such perils can be covered.
As a general statement, a negative film policy covers the cost incurred to rephotograph, retape, recreate or reprogram an insured production due to the direct physical loss, damage to or destruction of exposed motion picture film (whether developed or undeveloped) as well as recorded video tape, videotape stock, raw film stock, interpositives, positives, work prints, sound tracks, art work used to create animation images, software (broadly defined, includes any combination of data, media or computer programs) used to generate computer images, while such property is used or to be used in connection with an insured production.
Digital data that is magnetically stored in a hard drive (a sealed container which holds a stack of hard disks on which the data resides) would seem to be covered as software under the negative coverage policy definition.
Nevertheless, standard policy language that very specifically confirms coverage for hard drives, spinning discs, solid state recording devices, P-2 cards, flash memory, memory cards, optical discs and other recording mediums is yet to be devised and is only occasionally written, and if so, only for major entertainment clients.
Consideration should be given to extending this wording to all negative coverage forms, given the likelihood that these elements are currently as (or more) likely to be employed in the filmmaking process.
The faulty coverages (faulty equipment, faulty stock and faulty processing) exclude loss due to: faulty manipulating or judgment of the camera operator or assistants and incorrect use of raw film stock, videotape or media/software. Processing errors occurring in the film laboratories are generally covered.
At the same time, however, the policy does not customarily respond to post-production operator error in digital post activities. Thus, errors made in the film lab by the lab technicians are covered, but errors made in digital processing by digital technicians employed by the company may not be covered. A dropped digital camera may damage the captured images inside, and such loss would likely be covered; loss of the same data due to a bad instruction regarding, or faulty manipulation of, the same camera, would likely not be covered.
To their credit, film industry insurers acknowledge that their intent is to cover the same/similar risks with respect to negative and faulty coverages, irrespective of the specific medium (film, video or digital) employed. At the same time, intent can be more compelling when articulated clearly in the policy form, and at present, this is not often the case.
For example, major production companies and studios are sometimes able to negotiate a coverage extension that provides limited coverage for cameraman or operator error. Typically capped at $250,000 and costing an additional premium, coverage is available for claims arising out of operator error, including faulty manipulation or faulty operation of camera, lighting, sound, electrical, editing or any other equipment, or technician's error of judgment.
The transition from film to digital makes this coverage vital and insurers need to find a means of providing this coverage to a broader range of clients.
Negative and faulty coverages specifically include software (data, media or computer programs) and related material used to generate computer images. Yet, to the extent that such software and related material are identified as source materials, coverage for such source materials ends once the image is captured and embodied in the film negative because the intent of the policy is to insure the final film--and only the final film. Therefore, under the current constructs, source material intended to be re-used for additional purposes, such as related advertising, games, sequels, prequels and spin-offs, is at risk and uninsured from the moment its original use has been fulfilled.
As technology, content and branding evolve, the ability and desire to use and reuse source material will grow, and there is a need for a policy that provides an extended term coverage for such materials for an additional premium.
Our industry is at the forefront of addressing the implications and risks associated with what the Science and Technology Council of the Academy of Motion Picture Art and Sciences calls the "Digital Dilemma" - the built-in obsolescence of any ? but, particularly, digital ? technology and the need to preserve digital assets at a reasonable cost.
The digital production revolution requires a complete and correct risk-management and insurance approach to support its growth and innovation.
In addition to creating policy coverage forms and endorsements that specifically contemplate and address these issues within the entertainment sphere, the ultimate application will be global.
December 1, 2010
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