Show stoppers

In HIH Casualty New Hampshire, Lord Justice Rix noted that “film production is a risky business”. Just how risky is something that is becoming clear as the film finance insurance claims enter their next phase, following Court of Appeal decisions (see box).
The litigation lies in the complicated arrangements that were put in place for the funding of several 'slates' of films. The precise funding arrangements differ between the various claims, but in general, banks were approached to provide finance for a number of films, with the loans to be repaid from the revenues generated by the films' commercial exploitation. To protect the banks if the films were unsuccessful, the loan applicants were to obtain insurance for the banks against the risk that the revenues would fail to meet certain levels.
This form of insurance, which the Court of Appeal in HIH Casualty New Hampshire described as being “of a somewhat novel kind”, appears to have been developed in the early 1990s. Some insurance was written under line slips, by which subscribing underwriters agreed to insure a number of films up to a specified sum over a particular period.
Crossing arrangements were agreed which enabled insurers to apply the revenue from profitable films to offset the losses that were being recorded against unsuccessful films on the same slate. The insurers risk was that the films would not sell, and they were dependent upon the accuracy of revenue estimates produced by sales agents for the production companies before the films had been produced.
Many, if not most, of the films insured were unsuccessful and insurers and reinsurers found themselves faced with large claims. They have sought to contest a number of the claims on grounds that material non-disclosures and misrepresentations were made during the placing of the insurance. Particular attention is being focused on the role of the brokers responsible for placing the risk and on the risk managers who were to report to insurers on the prospects of the various film productions.
The banks have sought to rely on anti-avoidance provisions in the policy wordings, which were (somewhat ironically) included as 'Truth of Statement' clauses. The scope of these clauses and the method and effect of their incorporation into insurance and reinsurance contracts has been the subject of close examination by the Court of Appeal in HIH Casualty New Hampshire and HIH Casualty Chase Manhattan. These decisions have a potentially wideranging effect given the growing use of anti-avoidance provisions in commercial insurance policies. HIH Casualty Chase Manhattan is to be reviewed in the House of Lords late next year.
But those cases are the tip of the iceberg. There are a large number of cases pending in the Commercial Court and the losses claimed run into hundreds of millions of pounds. The principal firms involved to date include: DLA, Freshfields Bruckhaus Deringer and Morgan Lewis & Bockius for the banks; Barlow Lyde & Gilbert, CMS Cameron McKenna, Davies Arnold Cooper, DJ Freeman and Herbert Smith for insurers; and Eversheds for brokers.
The sheer number of claims has demanded coordinated case management from the Commercial Court. It remains to be seen whether the claims can be effectively advanced pending the House of Lords' review of HIH Chase Manhattan.
Alex Gunning is a barrister at 4 Pump Court