Completion Insurance: A Hollywood Movie Industry Necessity?

Given that the commercial viability of a movie script – never mind its box office earnings potential – is still a hit-and-miss affair, is completion insurance a true Hollywood movie industry necessity? 

By: Ringo Bones 

The falling out between Mel Gibson and famed screenwriter Joe Eszterhas a few months ago had cast the light yet again on how Hollywood would make money in the austere fiscal environment of our post global credit crunch world. Earlier this year, Mel Gibson and Joe Eszterhas collaborated to make a big-budget epic Maccabees movie – i.e. about the origin of Hanukah of a historical Jewish figure often referred to as the “Jewish Braveheart”. The irreconcilable differences between Eszterhas and Gibson that eventually scrapped the proposed big-budget epic were due to Gibson’s insistence to rewrite the script in order for the film to convince Jews to convert to Catholicism. And completion insurance policies are created for such an occasion. 

Completion insurance – more often referred to as completion guarantee or completion bond – is a form of insurance offered by a completion guarantor company in return for a percentage fee based on the movie’s budget guaranteeing that the producer will complete and deliver the film based on an agreed script. This is often used in independently financed films to guarantee that the producer will complete and deliver the film based on an agreed script, cast and budget to the distributors thereby triggering the payment of minimum distribution guarantees not just to the producer – but also to the banks and investors who cash flowed the guarantee, as a discount, to the producer to trigger production.  

The Hollywood movie industry’s necessity for completion insurance was probably born by changes on how movies were made a little over 60 years ago. By 1951, all major studios had diversified themselves of their theater holdings, retaining instead their distribution organizations. Once this was done, the producers were suddenly freed of the obligation to maintain a flow of films merely to keep their affiliated theaters in operation. 

This practice, the basis of the “factory system” of production that had dominated the 1920s and 1930s had invariably sacrificed quality for quantity; but because the films were sold long before the first camera turned, there had been a certain economic stability in the industry. When pictures began to be bought on the basis of quality – or at least of presumable box-office appeal – the studio heads panicked. They cut back on production and looked for ways to effect economics in their studio operations. One way that occurred to them was to close out their contracts with their high-priced stars. 

Further complicating the production scene is the steady decline in the number of films made in the United States. In 1961, only 10 of the 39 pictures before the cameras were filmed in Hollywood; the rest were filmed elsewhere in the United States and abroad. The major studios, once geared to turn out as much as a picture a week each, can now barely muster two hundred a year among them – a figure, incidentally, which includes their releases of independent productions. As a result, more depends on the success of every picture. No longer can losses on one film be amortized by the success of a dozen others.

With production costs having spiraled from an estimated average of 400,000 US dollars per picture in 1937 to over 1.5-million US dollars in 1962, thus the studios simply cannot afford to take chances. Thus, a low-budget “original” by an unknown writer, with an actor that no one ever heard off, is certainly less attractive to studios than a hit play with a bevy of costly stars. Such “insurance” is considered necessary as a hedge against the hundreds of thousands of dollars that must be invested in such “below the line” costs such as settings, costumes, raw stock, laboratory processing, etc. A case in point was the 5.5-million US dollars that Warner Bros. reputedly paid back then for My Fair Lady would be considered good business. 

It protected the studio’s investment with a pre-sold commodity so far as the audiences were concerned, and offered the banks (the ultimate financiers of most movies) the kind of securities that they would be willing to advance money on. The net result is that whereas the soaring costs of production have caused alarm throughout the movie industry, most producers believe that the only way to stay in business is to - paradoxically - spend more money.