They are saying you have to take advantage of any early upgrade subsidized pricing.
For example, if I broke my phone tomorrow and they could not repair, they would pay $599 for a new phone (since if I signed a new contract with AT&T tomorrow I would have no subsidy based on having just received the full upgrade discount.
If I was eligible for "early upgrade" pricing, usually 299 for 16gb and 399 for 32 gb (I think), I would have to use that early upgrade, and Squaretrade would reimburse either the 299 or 399 I had to spend.
If the phone broke in 1 year and 11 months, and for some reason I wanted to replace using the $50 deductible instead of a getting a new phone entirely, I would have to use the full upgrade discount, thus making the elegible reimbursement 199 for 16 gb or 299 for 32.
Make sense? They are saying that if you are elegible for cheaper pricing through AT&T subsidy for signing a new 2 year contract, they will only reimburse for the subsidy you are elegible for.
Now, having said that, you wouldn't have to sign up for a new 2 year contract, you'd just have to eat the difference in price between what you COULD have bought it for with a new 2 year plan and what you actually paid if you didn't sign a new contract.
That help?