It is possible insurers were seduced by Hollywood but at the end of the day it is just another business

Jacqueline Hurt, Olswang

Insurance companies are resisting paying out money on a series of movie flops that they were underwriting.

Hundreds of similar cases are expected to be heard both in the US and the UK in the coming months.

Flops

The total litigation involves claims worth more than $1bn (�600m), according to the Financial Times.

The Royal Bank of Canada (RBC) is seeking to recover up to �9.2m it lent to underwritten films, including The Secret Life of Algernon, Lucan and Managua, all of which suffered at the box office.

All nine films, most of which were Canadian or British and made in the late 1990s, were covered by "shortfall contingency" policies from a variety of different syndicates at insurance companies, including Lloyd's of London.

The policies - known as TVC insurance - are designed to encourage banks to lend money to producers.

This is on the understanding that their risk is protected by an insurance policy that pays out if the film does not meet specified sales targets.

Expanded

Alaistair Schaff QC, appearing for the RBC, said the films in question were "comparatively low budget, independent productions".

Loans had become necessary because of the significant "gap" between the anticipated costs of production and the sums generated by pre-sales, tax credits and investors.

It is an extremely complex legal situation

Adam Davies, Investrum

Roger Enock, partner at UK law firm Freshfields, Bruckhaus, Deringer acting for the bank, said the case was the first of its kind and arose out of a particular insurance product developed in the early 1990s.

He said the films "did not sell as much as originally estimated".

"Therefore that leaves the bank's loan outstanding and they are claiming on the insurance," he added.

"There are a number of other cases involving different banks and some of the same insurers here, as well as different insurers."

One film finance expert, Adam Davies, managing director of Investrum Ltd, said the claims by banks could total more than $1.6bn.

"It is an extremely complex legal situation with insurers, re-insurers, financial institutions, producers, sales agents and completion bond guarantors all involved," he said.

Jacqueline Hurt, of legal firm Olswang, told BBC News Online: "Banks often loan film finance to production companies based on sales estimates for films that have been pre-sold to territories before they have been made.

Gaps

"Insurance companies stepped in and offered premiums to banks on any gaps in the financing and these quickly became very popular.

"The gaps that the banks were prepared to loan against became bigger and bigger."

Ms Hurt said this had lead to a large amount of films entering the market place that had not been market-tested and had not been pre-sold to territories.

The notoriously fickle nature of the industry, particularly the success and failure of movies, led to many films failing to meet their sales estimates.

Glamour

But when the banks then asked insurance companies to pay out on their policies, some of them refused.

They say the films involved were not made to standards or in the timescale promised.

"It is possible they [the banks] were seduced by Hollywood but at the end of the day it is just another business," said Ms Hurt.

Whatever the outcome of the trials it is clear that banks could be less likely to loan finance to production companies that have failed to secure distribution and sales deals.

That could in turn lead to fewer films going into producton but of those that are, success may be a bit more reliable.

The court case involving Royal Bank of Canada continues.