Preneed planning often begins with the purchase of a cemetery plot or cremation niche. If that purchase includes a marker or monument, the cemetery will typically seek to deliver the marker so that it may avoid cost increases incurred with regard to granite and bronze. But, many of us do not like to be reminded of mortality, and a grave marker with our name tends to bring home that issue. Consequently, cemeteries and monument companies typically offer constructive delivery options. If the concept of constructive delivery is foreign to consumers, the Federal Trade Commission outlined different constructive delivery options in a recent letter to the Pennsylvania legislature. The description of construction delivery begins on Page 5. The constructive delivery issue in dispute in Pennsylvania is whether grave vault deliveries should be deferred until the interment is made. Pennsylvania funeral directors are asserting that vaults could be damaged by years of exposure.
In an unusual move for a death care regulator, the Federal Trade Commission weighed in on the preneed turf war that has erupted between Pennsylvania funeral directors and StoneMor Partners. At the request of the chairman for a Pennsylvania legislative committee, the FTC responded with a detailed letter warning against various bill proposals aimed at curtailing preneed sales by cemeteries. The FTC letter addressed preneed trusting and delivery procedures by cemeteries, and concluded that proposed legislation could lessen competition between cemeteries and funeral homes, and cause higher prices to consumers without providing any countervailing consumer benefits.
The Commission acknowledged that raising the trusting requirement for cemetery preneed sales from 70% to 100% would preclude the cemetery from recovering overhead, selling and administrative expenses associated with preneed sales. This would discourage cemeteries from using trust funded preneed, and that would likely increase the costs of serving the pre-need market, and deny the consumer the lowest possible price and a full array of pre-need alternatives and pricing options. The FTC went on to recommend that the General Assembly consider alternatives to raising the trusting requirement for cemeteries. What the FTC should have suggested, but failed to, would be to lower the trusting requirement imposed on Pennsylvania funeral homes so that they could offer more preneed alternatives to their families. Pennsylvania’s 100% trusting requirement for funeral contracts limits the proactive preneed programs to using insurance that pays sufficient commissions to fund preneed overhead, marketing and selling expenses.
But, the environment in Pennsylvania is far more complicated than just the trusting requirement. For the background of those issues we would refer readers to two articles published by the Daily Times News: Voices Raised About Catholic Cemeteries and Funeral Directors Cry Foul Over StoneMor. We will take a look at the constructive delivery issues in a future blog post.
In September of last year, the Columbus Dispatch published a story critical of the Ohio State Board of Funeral Directors and Embalmers. Examining the Board’s efforts to address preneed fraud, the story reported that prosecutions of funeral directors were more the result of consumer complaints than Board inspections. That must have struck a nerve with Governor John Kasich, who appointed a public member to the Board with an apparent instruction to “shake things up”. The conflict that has since ensued between the Board’s executive director and the public member recently became national news. The spin coming from the various news sources has been very negative regarding the willingness of industry boards to prosecute their own members. But, those stories beg the question about the role that a state funeral board should take when initiating criminal prosecutions.
When Missouri re-wrote its preneed law in the wake of the National Prearranged Services scandal, the legislature sought recommendations from a committee of industry representatives, consumer groups and regulatory agencies. One of the committee’s initial discussions was whether preneed oversight should be transferred to a state agency other than the Missouri State Board of Embalmers and Funeral Directors. Ultimately, the committee recommended that the State Board retain primary jurisdiction. As explained in prior posts (It’s not my job, man. and Missouri’s Preneed Reform: the 2015 Factor.), this author endorsed that decision. An industry board can better assess a preneed seller’s actions for intent to comply with the preneed law. But now, Missouri funeral directors and their association are asking why their State Board hasn’t been more proactive in pursuing the bad apples.
One factor is the difficulty in distinguishing honest mistakes from the intent to avoid the law. The majority of funeral homes are family owned and operated. The owner wears many hats, and the administration of consumer payments is often pushed to the back of the desk when a death call is received. The funeral home’s books and records could help the State Board to make the distinction, but Missouri has never specified what records are required. Consequently, the quality of recordkeeping in Missouri can vary substantially from funeral home to funeral home.
Those calling for an industry board to take the initiative in criminal prosecutions should also consider whether a group of laymen (and possible competitors) should be making the decision to prosecute. That decision should be left to the State Attorney’s office or the local prosecutor. The local prosecutor should be the first choice because of the motivation to protect his/her constituents. However, local prosecutors will not be familiar with the obscure law that governs preneed contracts. The local prosecutor’s job is further complicated when the preneed law is decades old. Prosecution in Missouri is much easier under the 2009 law than it was under the 1982 law.
The current controversy in Ohio concerns whether the email response of the State Board executive director to the reporter had been altered: “I am unwilling to comment on how our inspectors examine pre-need contracts, or conduct pre-need audits as it could seriously impede our ability to identify fraud in the future if published.” Giving Ms. Niekamp the benefit of the doubt, including the italicized language does little to make her response less evasive. We have gotten the same response from regulators in Illinois and Missouri. The reality is that it is very difficult to identify preneed fraud when the unfunded contracts are hidden, and regulators do not want to acknowledge that fact. Detecting fraud is often dependent upon having sufficient records so as to indentify irregularities in the seller’s practices. Such as servicing contracts without seeking payment. Or declining deposit activity when the number of sales are constant. Or insurance/trust distribution requests that do not tie to a statement of goods and services. Another sign of fraud would be when the preneed seller obstructs the inspection or audit process. To avoid the cloud of doubt that hangs over the Ohio State Board, an industry board should seek the input of the prosecutors and the state funeral directors association in the development of guidelines for the referral of preneed cases. One prominent state association executive expressed pride to this author in their role in making their state’s regulator more effective in combating preneed fraud.
If the Missouri State Board seems reluctant to pursue criminal prosecutions, the actions of the Missouri Funeral Directors and Embalmers Association have also been a factor. The Association has openly challenged the Board’s authority to request preneed records. While the challenges were intended to shield the Missouri Funeral Trust, the message given to funeral homes has been much broader. When the Board pressed funeral homes for preneed records, the Association insinuated to State Board members that they could have personal liability exposures pursuant to North Carolina State Board of Dental Examiners v. Federal Trade Commission. Subsequently, the Association’s master trust program sued the State Board for breaches of confidentiality alleging disclosures of information and documents obtained through an audit.
I, for one, have been frustrated by the lack of action regarding Missouri funeral directors that have blatantly thumbed their noses at Chapter 436. However, Association members who question the Board’s failure to pursue the bad apples need to appreciate the hypocrisy of their complaint.
The MFT did not catch a break with the court assigned to its lawsuit against the Missouri State Board of Embalmers and Funeral Directors and Catholic Fraternal Life. The hearing scheduled for September 28th was continued for another four weeks, and in the meantime, the parties continue to file evidentiary discovery requests. The Association’s preneed program now faces the burden of proving that documents and information produced for its audit have been obtained by a competitor, and that such documents and information are trade secrets that the court can require to be protected.
The underlying competition in this dispute is between the two basic methods of preneed funding: trusts versus insurance. The main marketing theme currently used by preneed insurance companies is that life insurance provides a predictable return that avoids the volatility of investment markets. This has a lure for conservative funeral directors who struggle with rising cremation rates and business costs. The investment return from trusts has been stymied by low interest rates and a volatile equities market. The MFT complaint hints at these circumstances when assertions were made that the auditor was privy to the program’s investment contracts and performance. Equipped with the program’s weaknesses, the auditor then went to work for an insurance company that already marketed to the program’s funeral home clients.
But, the MFT may find it difficult to prove to a court’s satisfaction that its investment performance is a trade secret, or the type of proprietary information that must be kept confidential from the program’s own clients. All trust funded programs are sensitive to how difficult the investment markets have been. But, the funeral home is entitled to such information when making the decision about what is best for the families that want to prepay their funeral expenses.
A status hearing is scheduled for September 28th in the lawsuit filed by the Missouri Funeral Trust against the State Board of Embalmers and Funeral Directors and Catholic Fraternal Life. The lawsuit is now 4 months removed from the request for a temporary restraining order that, among other relief sought, would stay the financial examination of one of Missouri’s largest preneed sellers. Frustrated by an examination process that has lasted four years, the Missouri Funeral Trust has asserted that it is entitled to an injunction because of the lack of controls the State Board has over confidential information obtained through the preneed examination process. But, the delay of the court in issuing a TRO does not bode well for the Missouri Funeral Trust.
This is the second lawsuit brought by the Missouri Funeral Trust to stem the State Board’s financial examination of the program’s books and records. In 2013, the program sought an injunction and a declaratory judgment against the State Board with regard to letters being sent to MFT contract holders. The State Board uses contract data provided by preneed sellers to generate letters that are sent to contract holders of accounts that are not paid in full. The letter makes an inquiry to the contract holder whether their account information stated in the letter is accurate. Referencing five such letters, the MFT cited the court to various problems with the consumer contact process. However, those claims were eventually dismissed.
If the September 28th hearing results in a court order that sets a discovery schedule without the issuance of an injunction against the State Board, the speculation is that the Missouri Funeral Trust will dismiss the lawsuit rather than comply with the defendants’ discovery requests. A court order that provides injunctive relief only against Catholic Fraternal Life puts the Missouri Funeral Trust in a precarious position. The Missouri Funeral Trust has been fairly open in its challenges to State Board requests for documents and records, but the program cannot prove its case against Catholic Fraternal Life without disclosing the documents and information it claims to be confidential. A Catch-22 of the MFT’s own making.
For an industry that has been dependent on interest income, the past 9 years have been tough on the death care industry. Interest rates started to decline 9 years ago, with the bottom hitting in 2008. Zero interest rates forced death care fiduciaries to diversify into equity investments, but trusts have experienced a sideways market for more than a year. Some market watchers predicted that the market’s performance through May of this year signaled a rally that could prove a return to better days. (Sideways Market – Breakout?) But, May has proven the year’s high point, and the markets have seen a significant slump since then.
There had been a glimmer of hope that the Federal Reserve would use its September meeting to announce the first rate hike since 2006, and the start of the return to normalcy for investment markets. But, the Federal Reserve blinked, and the investment markets reacted negatively again. This probably means a continuation of the sideways market through 2015, and possibly well into 2016.
One reaction from some funeral directors is that the 1% return of an insurance product is better than the uncertainty of a trust. The various price protection programs offered by insurance companies that specialize in preneed policies suggest that many funeral directors disagree.
The investment markets are forcing the sources of preneed funding to become more creative, and complex.
When the Missouri State Board of Embalmers and Funeral Directors meet this week, the role of the Board’s Financial Examination Committee will be discussed. As established, the Financial Examination Committee was intended to expedite the exam process. The initial Committee consisted of the Board’s public member and a former industry member who had previously acknowledged having limited experience with the different methods of funding preneed transactions. That Committee makeup has resulted in some sellers encountering a prolonged review process that involved multiple exchanges with the Committee and the Board’s staff. Our personal experience was that the Financial Examination committee would reiterate examiner conclusions without articulating the Board’s position and authority with regard to exceptions disputed by the seller. Among the proposed regulations to be discussed by the Board is one that would revise the Financial Examination Committee. We do not think the changes to the Committee go far enough.
When the legislature sought input in 2008 to re-write Missouri’s preneed law, there was discussion concerning the transfer of preneed supervision to the Missouri’s bank regulator. We supported the Board’s continued supervision of preneed transactions because of the complexity of the transaction. An industry board would have far greater experience with the three methods of funding. However, that intent is being circumvented with seller disputes are retained by the Committee rather than being referred to the full Board for consideration.
The Committee does serve an important role in reducing the Board’s workload. However, the Committee’s interpretation of SB1 cannot be substituted for that of the full Board. If a seller disputes the interpretation of a statute as applied by the examiner, and the Committee, then the issue should be referred to the Board. The Board should determine if the seller need to be summoned to a meeting to explain the issue. The referral of the issue should be accompanied with notice to the seller with an explanation of the Committee’s position and legal authority. Accordingly, we would revise the proposed regulation pursuant to the attached.
When the Missouri State Board of Embalmers and Funeral Directors meets this week, their staff will be seeking input regarding the scope of the second round of preneed audits. Each preneed seller is to be audited at least once every five years, and the first round of audits was ‘concluded’ this year. Included on the meeting agenda is the staff’s proposed scope of the financial examinations. The staff had previously acknowledged that the first audit would focus on each seller’s contracts and recordkeeping. Now that each seller’s contracts and records have been review, where should the next audit focus?
Obviously, some sellers had/have recordkeeping problems, and the next audit will need to determine if progress has been made to correct their problems. But, we would question whether 100% of all contracts need to be reviewed if a seller’s first examination found the recordkeeping and contract forms to be in compliance. A sampling review of the ‘new’ contracts would suffice for sellers with compliant recordkeeping. But even for a seller with deficient recordkeeping, the examination may need to focus more on the method for booking contracts, payments and distributions.
Similarly, the examination process could use a sampling approach with regard to consumer contacts. A seller’s first examination included a letter to each consumer that was not shown as having a paid in full arrangement. Instead, a sampling of consumer letters could be sent. However, that sampling should also incorporate current contract data. The use of stale contract data by the Board’s examiners led to consumer confusion, and seller frustration.
But, the more important shift in the examination scope could be the inclusion of procedures to test the seller’s death claims. One criticism made of the examination process by Missouri funeral directors was that it would be impossible for auditors to find the ‘hidden drawer’. In other words, it is very difficult to find the funeral director that hides his unfunded contracts. There is truth to that statement. But a review of the seller’s statements of goods and services can lead an examiner to irregularities that could be a flag for fraud. (Why did you provide these funerals without seeking payment from the family?)
The lawsuit brought by the Missouri Funeral Trust against the Missouri State Board of Embalmers and Funeral Directors and CFL Pre-Need includes a number of unique and dubious claims. For example, the lawsuit defines CFL Pre-Need, an insurance company, as a competitor but not funeral home clients that are licensed as a preneed seller. The lawsuit also claims that CFL Pre-Need would not, but for information obtained through the auditor, be able to steal away clients. With information obtained through the audit, the MFT also asserts that CFL Pre-Need can engage in price fixing, cutthroat pricing, and other improper pricing activities on various products and services. We will examine these allegations in future posts, but for this article we will examine the crux of the MFT lawsuit: its customer list (the provider funeral homes) is a trade secret.
While the lawsuit assets claims that fall under the Missouri Uniform Trade Secret Act, the petition never cites the court to Chapter 417. That may reflect the plaintiff’s recognition that the Missouri courts have yet to treat a customer list as a protectable trade secret under the Act. That’s not to say a customer list could not be a trade secret, but as a recent Armstrong Teasdale’s Employment Law Letter explains, the party seeking to establish a customer list as a trade secret has to pass a six factor test. The last element of that test may prove very difficult for the MFT to satisfy: the ease or difficulty with which the information could be properly acquired or duplicated by others.
A company like CFL Pre-Need has a finite population of possible Missouri funeral home clients. Not being licensed as a preneed seller, the company can only market its insurance through funeral homes that have a preneed seller’s license. A list of those funeral homes can be downloaded from the website of the Division of Professional Registration. To determine whether a funeral home is also a MFT client, one merely needs to visit the funeral home’s website. It would seem that the MFT has a formidable challenge to establishing its customer list as a trade secret.
If the MFT cannot establish its funeral home client list as a trade secret, it then has the unenviable task of proving that its investment performance, administrative charges, investment contracts and program documents are trade secrets under the Uniform Trade Secrets Act.
Using its emergency rulemaking authority, the Missouri State Board of Embalmers and Funeral Directors reduced the state preneed contract fee from $36 to $25. The change is to go in effect on September 1, 2015, the first day of the next reporting period.