To Backup or not to backup, that is the real question ?

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The questions you asked have been discused here many times before. (read the rules and also use the search button). It is legal for someone to backup a game providing they own the original. As for the error message you mention

u get a error message saying "please insert the correct cd"

Actually that isnt a error message. If you had made a 1.1 backup of the game the "please insert original cd" message wouldnt appear. (use search for info on 1.1 backups). Anyway when you backup a game as long as you are able to install the game you have made a working copy. Simply download a nocd or fixed exe from here (GCW) and replace the original exe with the cracked one and hey presto the message "please insert original CD" no longer appears. (once you replace the exe you can normally play without a CD in the drive @ all providing you pick the full install option when installing the game). All i have mentioned and much more is coverd in the stickies/rules, use the search option to and you will have all the info you need to be able to backup games and make them work no probs.

Im now going to have to pay cash to EA for a replacement.

Actually i think that EA will replace the broken disk providing you have proof of purchase. You may have to cover postal cost but it wont cost as much as replacing the game.
Hope this clears things up for you. We were all NoObies once.