 The
Underwriting Process
This section is intended to (1) describe the completion guaranty
underwriting process from the initial project introduction and application
stage through the issuance of a completion guaranty; and (2) to
provide a compilation of suggested underwriting questions that must
be answered satisfactorily prior to the approval and execution of
formal guaranty documents.
A. Areas of Risk Evaluation
Underwriting procedures and processes can be divided into three
distinct areas of risk evaluation and analysis. Although conceptually
separate, each area interacts and overlaps with the others such
that a changed or problematic element in any one area often triggers
or requires changes or modifications in the other two. These three
conceptual areas include:
1. Production/Finance
Sites, equipment, labor and technical requirements must be adequately
scheduled and budgeted in terms of (1) customary market cost’
(2) work-style, union and guild affiliations, pace and reputation
of key crew and cast members; and (3) legal, insurance and financial
parameters and considerations characterizing the particular overall
structure of the deal.
2. Insurance Analysis and Evaluation
The adequacy of insurance coverage is evaluated in terms of the
proposed net insurable and proposed terms, limits and deductibles.
In addition to standard production portfolio coverages, one requires
that adequate Errors and Omissions, Public Liability, Workman’s
Compensation and Guild Required Travel and Hazardous Conditions
Cover be placed. Bond personnel also determine the need for additional
insurances such as Political Risk/Contract Frustration Cover,
Marine and Watercraft, Weather, Aircraft, Animal and/or other
special risk coverages.
Higher than normal deductibles must be specifically budgeted and
accounted for, and the guarantor must be named as an additional
insured and joint loss-payee on all binders and certificates.
Exclusions or restrictions in cast insurance policies must be
reviewed on a case-by-case basis.
3. Legal Analysis and Evaluation
The terms and conditions contained and/or implied in the legal
documents, contracts and agreements entered into on behalf of
the production/producer must all be evaluated in terms of their
internal consistency and validity, as well as the adherence of
their terms and conditions to the proposed screenplay, production
schedule, budget, and delivery requirements. All existing contracts
are analyzed and approved before a guaranty is issued. Where contracts
have not been completed, details of proposed contracts are obtained.
The terms of the production, distribution and financing arrangement
(s) are analyzed and reconciled with both our standard documentation
terms and conditions, as well as with the screenplay, budget and
schedule. Delivery items and other triggers to the release of
the guarantor from further obligations under its guaranty are
brought to the attention of the Production and Accounting Staff
to ensure that technical delivery of all the named items and elements
is contemplated by the schedule, budget and other production agreements
under review.
B. Overall Process
Clients typically submit projects for initial consideration prior
to the stage at which the shooting script, production budget and
shooting schedule are finalized. As a courtesy to clients, Production
Analysts undertake a general informal review of these three production
elements (together with consideration of abilities of contemplated
director and producer) at this early stage so as to ascertain that
the budget and schedule are generally adequate for the script and
that there are not insurmountable risks attached to the general
overall project.
Following the cursory review, the Production executives meet with
the client to confirm interest in pursuing the project and to obtain
general information regarding the source (s) of distribution and
financing for the project. This basic information is noted along
with the names of an anticipated key cast and crewmembers, attorney’s
name (s) and firm (s), and insurance broker (s). Other details of
the project are also noted, given the information available at this
time.
It is sometimes the case that the proposed financier of the project
is unwilling to move forward with the loan underwriting until it
is assured that a reputable completion guarantor is committed, in
principle, to issue a guaranty for the project. In such instances,
the guarantor may, in the strength of its prior relationship with
(or knowledge of) the producer (and/or distributor), issue a very
general Letter of Intent, which is forwarded to the client and financier
(along with informational materials and memoranda). Once a client
has secured firm distribution commitments and firm financing arrangements
for the project, staff members undertake detailed analyses in the
three areas -- Production/Finance, Insurance and Legal – described
above.
The Production Executives read, review and analyze the script, schedule
and budget and discuss the production plans with the film’s
production staff (including the director, if deemed necessary).
In such analysis, the staff considers particulars of special effects
(i.e. wind, rain, lightning) and machinery (i.e. wind machines,
rain machines) which will be required; special technology, such
as camera cranes for overhead shots (if specified) or camera “tracks”
for moving camera shots; special props and décor (i.e. breakaway
“glass” windowpanes) which will be required for the
scenes described in the script and the plan for shooting them; and
what will be required in terms of special crews, extra cameras (to
simultaneously shoot and explosion from 10 angles), etc. Discussions,
correspondence and ongoing dialogue between the guarantor and the
production team commence and continue. The staff meet regularly
on an “in-house” basis and with the client to discuss,
amend and approve all production elements, including the budget,
shooting schedule, production “boards”, and the anticipated
post-production plans. If the project’s production staff have
already prepared script breakdown, it is compared with the Production
Executive’s own analysis.
The guarantor’s business affairs executive simultaneously
discusses and explains the general insurance coverage requirements
and contacts the client’s broker regarding the receipt of
insurance binders and confirmation of coverage. Any special or extraordinary
coverages are also discussed with both the client and with the broker.
The Legal Staff or outside counsel (if applicable) request copies
of all relevant legal documentation very early in the underwriting
process. Based upon its analysis of the production elements, the
guarantor may require the executive, prior to the issuance of a
guaranty, of a Director’s and Art Director’s Inducement
Letters which are forwarded to the Producer (and Producer’s
attorney) for their review. As documents are made available to the
Legal Staff or outside counsel, each is reviewed and summarized,
with summary reports of such documents circulated to Production,
Insurance and Executive Staff. A reconciliation of contractually
required payments, salaries, fringe benefits, etc. with the production
budget and schedule is attempted, with inconsistencies noted, questioned
and reformulated.
As final form, executed production documents are rarely completed
and forwarded for the guarantor’s review until just prior
to the closing and execution of a completion guaranty, a legal checklist
regarding still outstanding documents is updated on a regular basis,
and the Producer, Beneficiary and their legal representatives are
notified that such certain documentation is still outstanding. If
it is necessary (for funding purposes) to close the guaranty prior
to the receipt of all executed production documents, the Legal Staff
review such agreements and receive confirmation that such agreements,
as executed will conform to the drafts. The entire underwriting
process culminates in the execution of formal guaranty documents,
which is preceded by a “Pre-Closing” meeting of all
the Underwriting and Executive Staff. A checklist that synchronizes
outstanding issues, problems, documents, and questions is circulated
internally, prior to the meeting, and is later used as the agenda
form that guides this final, formal underwriting session. The documents
issued are then adapted to reflect the guarantor’s formal
positions, exclusions and other safeguards instituted to limit risk
to truly unpredictable events and/or actions.
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