You are trying to look at two different programs. The $199 replacement is for out of warranty damaged phones, not for lost phones, and that is provided by Apple, not AT&T.
If you lose your phone, the only thing AT&T will do for you is allow you to either purchase a new phone at full price, or if you had not purchased the old one under the subsidized price, to do an upgrade and the price would be dependent on where you are in your contract cycle. If you got the phone subsidized, you can either purchase for full price, or add a line to get the subsidized price.
AT&T will not lock devices here in the US.
Sorry, misread your post. Since you are under contract, the only alternative is full price. Also, they will disable the SIM card that is in the phone, but they do not disable the IMEI, so with another SIM, the phone could be used again.