Death Care Law Blog : Kansas Death Care and Preneed Lawyer & Attorney : Stalter Legal Services Law Firm : Funeral Law, Elder Law : Kansas City

Continuing the theme that effective preneed regulation requires the occasional update, the Missouri legislature is poised to pass the first ‘patch’ to SB1, the 2009 legislation that ‘re-wrote’ Chapter 436. Senate Bill No. 340 will make four noteworthy changes to Chapter 436.

Concerned that preneed sellers would use variable annuities to fund preneed contracts, Missouri’s insurance regulators sought to have SB1 limit the use of annuities to the single premium variety. This proved burdensome to funeral homes committed to insurance funded preneed. The single premium requirement denied the funeral home the use of variable pay annuities for consumers who either do not qualify for life insurance, or who cannot afford the premium of a life insurance policy. SB340 appropriately allows variable pay annuities to be used to fund preneed contracts so long as death benefits are never less than the premiums paid.

While SB1 preserved the use of joint account funded preneed, small operators encountered problems with banks and the Patriot Act. SB340 will allow POD accounts to be used in funding preneed contracts.

SB1 provided for retroactive application in certain respects. But, with regard to preneed trusts in existence prior to August 28, 2009, SB1 provided for historic law treatment with regard to income distributions to sellers and the use of income to pay trust expenses. Section 436.031 authorized the distribution of trust income to the seller provided the mark to market requirement was satisfied. The section also obligated the seller to pay trust expenses and taxes because of trust income withdrawals. SB340 will delete that provision, and it isn’t clear the intent for this change.

Section 436.031 of the prior law also allowed a preneed seller to designate an investment advisor, and in doing so, relieve the trustee of all asset management responsibilities. This provision was exploited by NPS, and was pivotal in conversion of millions of dollars of preneed trusts to worthless insurance. Seeking a completely independent trustee, SB1 imposed restrictions on who could serve as an investment advisor to the trust. While the NPS experience proved the need to keep the fiduciary responsible for asset management, SB1 went too far in driving a wedge between the asset manager and the seller. SB340 will create an exception to that restriction for the “external” investment advisor who satisfies Section 436.440.

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Yesterday, the St. Louis Post Dispatch reported on the federal indictments handed down against six NPS officials. The article includes two statements that hint at the legal strategies to be employed by NPS and federal prosecutors.

"We have anticipated this (indictment) for a number of years, and he is looking forward to finally confronting these allegations line by line in court," Rosenblum said.

In 1992, Missouri filed a civil suit against National Prearranged that led to a court agreement on minimum deposits into trust accounts. That deal wasn't followed, and the defendants concealed their transactions from regulators in Missouri and other states, the federal indictment alleges.

The first statement, made by Doug Cassity’s attorney, is a posturing statement that warns of a long public trial. The message is twofold: we’re going to make you spend a lot of money and we’re going to flyspeck the actions of Missouri regulators. Mr. Cassity’s legal team will likely assert that NPS complied with Missouri law, and did nothing to conceal its actions. Earlier this summer, NPS attorneys commented that the company was doing fine until regulators intervened in 2008. (If that were the case, why would Mr. Cassity have been anticipating the indictment for a number of years?)

Basing a defense on any failure of the State Board serves as a subterfuge. However, the federal prosecutor must respond by showing how NPS concealed its actions. With some Missouri funeral homes criticizing the former Attorney General for having let NPS off the 1992 hook, a NPS trial serves as a stark reminder to Governor Nixon of the lax enforcement of Chapter 436.

Missouri funeral directors should anticipate a get tough response from the Attorney General’s Office like that taken recently in Bates County.
 

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Almost a year to the date after SB1 was signed into law, one of the NPS sister companies was forced to close its doors. The recent Kansas City Star article about Mt. Washington Forever Funeral Home and Cemetery describes a situation that confused and disheartened the families who purchased Mt. Washington preneed contracts. The Missouri Attorney General’s subsequent press release offers little hope to the purchasers of preneed funeral contracts. While the press release offers some encouragement to preneed cemetery purchasers, those families also face the prospect of losing the funds paid to the cemetery.

Many consumers will lose some, or all, of the funds they paid Mt. Washington towards preneed contracts, and question why Missouri regulators did not act sooner. While operators and consumers both tend to view death care regulators as the ‘cops’, these state agencies lack both the authority or budget to summarily close businesses that break the law.

Within the next few weeks, both the Office of Endowed Care Cemeteries and the State Board of Embalmers and Funeral Directors will release to their respective industries new reporting requirements. Similar to reporting requirements imposed in Nebraska and Iowa, the Missouri regulators will begin seeking individual contract data from operators, and confirming data from preneed fiduciaries. These new reporting requirements will allow the regulators to begin identifying other potential Mt. Washingtons. But, regulators alone cannot protect every consumer. In the case of Mt. Washington, consumers have complained they were caught completely off guard by the closure.

If operator compliance reports were made available to the public, consumers could also assume a role in policing the preneed industry. In this vein, the OECC has expressed an interest in using the reporting requirements to form a grading system for operators’ compliance with state law requirements.

Such systems already exist in other states, Texas for one. Using a system that ranges from 1 (the highest level of compliance) to 5 (the lowest level of compliance), the operator is graded routinely on a number of issues. Such a system must be fair and equitable, and provide operators the opportunity to address issues. But once the process has been completed, the grades are then made public. Consumers are then able to access an operator’s audit report and grade to assess how safe the operator’s preneed funds are.

Rather than rely wholly upon the regulator, consumers must make inquiries before signing the contract and writing the check. If regulators do not make information available to the public, then consumers should begin asking their funeral home or cemetery whether certain types of information is available, and if so, can copies be provided:

• A copy of the death care operator’s current audit/examination report
• A summary of the annual report filed with the state regulator
• A summary of the current trustee report or insurance statement
• A contact name and email address with whom inquiries can be made of the preneed fiduciary or insurance carrier.

The Missouri Attorney General has advised Mt. Washington consumers to contact the AG’s office to file a complaint. Mt. Washington consumers also need to make inquiries to the Missouri funeral home regulator and/or the Missouri cemetery regulator.
 

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The Missouri State Board of Embalmers and Funeral Directors faces two hurdles to implementing SB1: disagreements over the interpretation of key provisions and informing the industry how the Board will enforce the law. These hurdles have put the Board in to a Catch 22 situation.

SB1 was drafted under the cloud of the NPS crisis. Legislators were lobbied from all sides, with positions as diametrically opposed as outlawing preneed to leaving Chapter 436 in tact. With limited assistance from the industry, legislators used the resources at hand and forged compromises. As a consequence, the law has several ambiguities, and crucial provisions can legitimately be interpreted differently. There is ample room for disagreements.

The disagreements over SB1 requirements have caused the State Board to reconsider how to best educate the industry. When contacted with SB1 questions, the Board’s staff (and website) recommends that licensees seek the advice of an attorney. This may be the appropriate ‘legal’ answer, but it is one that will frustrate the licensee. First, the advice requires the licensee to incur an expense at a time when it can be least afforded. Second, there is no assurance an attorney can provide an answer the licensee can rely upon. Some attorneys will turn to the Board’s legal staff, and it is not clear those attorneys are in a position to field questions about SB1.

As licensees, funeral directors do have a responsibility to educate themselves about the law’s requirements. We have heard this at recent Board meetings. But, before the licensee can educate himself on the law’s requirements, the State Board must be able to clearly articulate the law’s requirements. That could require weeks on most issues, if not months on other issues.
 

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The wait for Ms. Garrett’s lawsuit against NPS, the Cassity family (and anyone remotely connected with the Cassity Consortium) ended on August 7th.

If half of the allegations made in the NPS Complaint are true, the misconduct perpetrated on funeral homes and consumers is shocking to say the least. The Complaint provides a bevy of reform issues to explore. However, NOLHIGA and state regulators must be careful in their zeal to recover assets and implement reform.

A search of the Complaint for the term “independent investment advisor” will produce ten hits, with most of the substantive issues addressed on Pages 52 through 57. Chapter 436 of the Missouri statutes authorizes a preneed seller to designate an independent investment advisor to make investment decisions for the trust when it has more than $250,000 of assets. In doing so, the trustee is relieved of all liability regarding the investment decisions by the investment advisor.

As many larger Missouri sellers did, NPS designated an ‘independent’ investment advisor. The Complaint alleges that the investment advisor gave NPS free reign over the various trusts to perpetrate various frauds, including the purchase of the Lincoln Memorial insurance policies.

With regard to the fiduciary duties of the independent investment advisor, Complaint Paragraph 179 hits the nail on the head:

As purportedly “independent” investment advisors, Defendants Wulf and Wulf
Bates owed fiduciary duties to NPS as the entity that settled and funded the NPS pre-need trust accounts, and to the funeral homes and consumers as the beneficiaries of the pre-need trusts. Those fiduciary duties include, without limitation, loyalty, care, good faith, candor, sound business judgment, forthrightness, and fairness, through their direction and control over the trust funds.

In rubberstamping the NPS instructions, this investment advisor neglected his duties to the funeral homes and consumers.

In an effort to hold the NPS trustees accountable under Section 436.031, the Complaint alleges the investment advisor was not ‘independent’. This begs more than one question, but the first one that comes to mind is: independent of whom?
 

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News of Randy Sutton’s arrest was greeted by honking hearses in Missouri, Texas, Illinois, and a dozen or so other states. But, the question funeral directors are asking: What about the Cassity family?

Federal investigators need for someone to rollover and give up the Cassity crew, and apparently, Mr. Sutton is their choice.

Matt Damon’s new movie, the Informant will be out soon. That movie is about Archie Daniels Midland, a mega-food conglomerate based in Decatur, Illinois, my old hometown. Part of the movie was shot in the little town of Moweaqua, where my wife’s family lives. For weeks, we received photos of Matt Damon obliging the local residents. The story is about an ADM executive who turned informant on his employer’s misdeeds, but took a fall due to his own conduct.

As the Feds put the screws to Mr. Sutton, funeral directors can only hope those investigators can connect the dots. If they do, and the Cassity family is implicated, who will play Mr. Sutton in the movie?
 

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Missouri’s Chapter 436 reform law goes into effect on August 28th, and the Missouri State Board of Embalmers and Funeral Directors will have the responsibility of implementing the new changes. However, the State Board is caught in a Catch 22 situation.

Many of the changes will have to be implemented through regulations, but the Board doesn’t have Chapter 436 rulemaking authority until August 28th. For example, preneed sellers and providers will have to be licensed on August 28th . Since this is a new requirement, every preneed seller in the state will have to file an application and fee to be licensed. There are hundreds of funeral homes that will seek a seller’s license, and not a one can sell a preneed contract until the license is in hand. But, the Board can’t begin passing regulations about the licenses until August 28th. To avoid a shutdown of the preneed industry, the State Board will have to improvise through the use of emergency regulations and temporary licenses.

Accordingly, the State Board will be meeting every week during the month of August to establish its priorities for Chapter 436 regulations. The Board’s agenda for those meetings are set out on its website.

The State Board is seeking input from funeral directors in the form of written questions or comments regarding the agenda issues. By seeking comments in advance of publishing proposed rules, the State Board is hoping to expedite the regulation approval process.

Historically, some Chapter 333 rules have taken up a year or more to pass. The rulemaking process requires a Board meeting to discuss the issue and direct the legal staff to draft a proposal. Then a few months later at the next meeting, the Board will consider the proposal, and if acceptable, submit the proposal to the Secretary of State’s office for the publication process. With the publication, there is a comment period. Then, the comments are discussed at the next scheduled Board meeting. Depending upon the comments, the proposal may be revised, and if so, there will be another publication and comment period. All in all, the rulemaking process can be lengthy.

In the meantime, the Missouri preneed industry is waiting on the Board for directions on such issues as contract disclosures and trust administration requirements.

Missouri is in for a long, painstaking period of change.
 

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When Missouri’s Chapter 436/NPS reform legislation began to take shape last summer, the state’s cemetery industry sought to get out of the train’s way by incorporating new preneed provisions into a Chapter 214 bill. To clarify that cemeteries could establish preneed programs that would be regulated exclusively under Chapter 214, and not Chapter 436, statutory exceptions were drafted into Senate Bill 1 not once, but twice. To add a belt to those suspenders, a statutory exception for cemeteries was also drafted into the Chapter 214 bill. But alas, there has been a small slip between the cusp and the lips.

SB1’s two ‘cemetery exemptions’ are found at Section 333.310 and Section 436.410. Section 333.310 was intended to exempt cemeteries from the State Funeral Board jurisdiction and Section 436.410 was intended to exempt cemeteries from Chapter 436.

333.310 The provisions of sections 333.310 to 333.340 shall not apply to a cemetery operator who sells contracts or arrangements for services for which payments received by, or on behalf of, the purchaser are required to be placed in an endowed care fund or for which a deposit into a segregated account is required under chapter 214, RSMo; provided that a cemetery operator shall comply with sections 333.310 to 333.340 if the contract or arrangement sold by the operator includes services that may only be provided by a licensed funeral director or embalmer.

436.410. The provisions of sections 436.400 to 436.520 shall not apply to any contract or other arrangement sold by a cemetery operator for which payments received by or on behalf of the purchaser are required to be placed in an endowed care fund or for which a deposit into a segregated account is required under chapter 214, RSMo; provided that a cemetery operator shall comply with sections 436.400 to 436.520 if the contract or arrangement sold by the operator includes services that may only be provided by a licensed funeral director or embalmer.

Both exemptions define a cemetery preneed arrangement where the purchaser’s payments must be deposited to an endowed care fund or a segregated account. One problem with this is that endowed care trusts cannot be used for preneed payments. A second problem is that the segregated account arrangement was eliminated from the final version of SB296. The Missouri cemetery industry’s last chance for a statutory exemption, a new Section 214.320.5, fell victim to a last minute deletion from SB296.

Missouri cemeteries now face an uncertain future with a new Chapter 436, and an expanded Chapter 333.

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While the settlement negotiated with the National Organization of Life and Health Insurance Guaranty Associations (“NOLHGA”) provides funding for the vast majority of NPS preneed contracts, there could be as many as 7,500 NPS preneed contracts that fall outside this coverage. For one of a couple of reasons, NPS never purchased an insurance policy for these preneed contracts. These are the NPS “orphan contracts” that regulators and the NPS Special Deputy must figure out what to do with.

NPS and its sister insurance companies were put into receivership by the Texas Department of Insurance. The special deputy receiver appointed to administer the NPS assets and liabilities negotiated coverage with the National Organization of Life and Health Guaranty Associations (NOLHGA). However, this coverage is dependent upon a policy (or sufficient evidence of the intent to purchase a policy) having been issued for the consumer’s preneed contract. In the absence of a policy, the guaranty association will not honor a claim, and the consumer will be forced to make a claim with the special deputy receiver.

The orphan contract is primarily a Missouri problem because NPS sold insurance funded preneed contracts in most states. For Missouri, NPS sold trust-funded contracts, or rolled a funeral home’s trust into a NPS trust (that subsequently purchased insurance). With regard to Missouri installment contracts, NPS apparently instructed the trustee to defer the insurance purchase until the contract was paid in full. Consequently, the consumers who are making payments on one of NPS’ Missouri contracts may have an orphaned contract.

The Missouri Insurance Guaranty Association is working with funeral homes to identify those NPS preneed contracts that are orphaned. Missouri consumers who are making installment payments on a NPS contract should contact their funeral director for assistance in determining whether their contract is orphaned or not.

With regard to these Missouri consumers, the Special Deputy Receiver and regulators need to consider that it was their recommendation that all consumers continue to pay on their NPS contracts in order to maintain coverage.

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Officially, its called House Committee Substitute for Senate Substitute for Senate Committee Substitute for Senate Bill 1.   Some of the ‘unofficial’ titles given this bill are not fit for publication.

It doesn’t matter who you talk to about Missouri’s current preneed reform bill, everyone has a complaint.  Even the consumer advocates.  Under normal circumstances, this general mood of discontent would ensure the defeat of a legislative proposal.  But these are not normal times, and it is appropriate that the Columbia Daily Tribune would remind the state of that fact by speaking with former Senator Jerry Howard.

In the early 1990’s, Senator Howard took on the problems of Chapter 436 and Chapter 214. While Senator Howard had success in addressing Missouri’s perpetual care law, Chapter 436 reform proved a greater hurdle.  More than a dozen years ago, representatives from the funeral and cemetery industries met with regulators to draft revisions to Chapter 436.  Although National Prearranged Service representatives attended those meetings, and provided tacit approval of the draft amendments, NPS had its own lobbying agenda.

Senator Howard took those amendment proposals to legislature, but could not obtain the necessary support of his fellow legislators.  Key legislators had been prepped for the proposals’ weaknesses.

HCS SS SCS SB1 has some flaws that need to be worked out, but time is running out for the current legislative session.  If the choice comes down to this bill or no bill, this bill should be passed with an understanding that its flaws need to be addressed by regulations and technical corrections in the next legislative session.

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Illinois and Missouri have more in common than they may realize. Consumers and funeral directors are blaming state regulators for their current preneed problems. Looking to avoid that hot seat, regulators have been stating their excuses/defenses. If legislators are to correct the flaws in their state’s preneed oversight, they need to put partisan politics aside and objectively assess those excuses.

In response to criticism about the IFDA master trust, the Illinois Comptroller’s office states: we don’t regulate trusts. With regard to preneed audits, the Comptroller follows the money from the consumer to the funeral home and into the IFDA trust. Once there, the Comptroller did not provide an extensive review of the trust’s activities. (Summary, it’s not my job to provide oversight once the funds make it to trust.)

The chink in the Comptroller’s IFDA armor is that the consumer funds never made it into a corporate trustee’s hands. The Comptroller’s excuse (we thought they had a corporate fiduciary) has funeral directors boiling. Rightfully so. While news reports and funeral homes have garbled the legal issues, the Comptroller’s function was to license preneed sellers, and for the IFDA, that meant the responsibility to ensure the organization had an appropriate fiduciary.

Missouri’s Division of Professional Registration and State Board of Embalmers and Funeral Directors have received the same type of criticism with regard to the NPS collapse. Those regulators have appropriately countered with explanations about how Chapter 436 tied their hands. Legislators and state agencies sponsored meetings last summer to obtain recommendations for improving Missouri’s preneed oversight. Those recommendations included the decision to continue the State Board’s jurisdiction over the preneed and to provide that entity greater licensing and oversight authorities.

Preneed regulation should begin with the licensing/registration of who may sell preneed. (I beg to differ with Ill. State Rep. Dan Brady, and those who assert preneed should only be sold by licensed funeral directors.) But that issue aside, who should provide oversight once the consumer’s funds are deposited to trust? I tend to agree with the Comptroller’s office that a state’s financial regulator is better suited for this job. However, there are ‘gaps’ to that recommendation. (State banking regulators do not have express jurisdiction over fiduciary institutions that derive their powers from a charter granted by the Office of Thrift Supervision or the Office of Comptroller of the Currency.)

While preneed licensing and payment administration oversight should be placed with a state’s agency charged with establishing minimum competency standards, oversight of the preneed trust should be with the state’s banking regulator. Federal preemption issues could be eliminated by statutory provisions that require the seller’s trustee to consent to limited jurisdiction as a condition to accepting the account. Preneed is too complex, too big, for a single state agency.

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It’s a fact that the NPS collapse threatens the viability of many Missouri funeral homes. It’s also a fact the Missouri State Board of Embalmers and Funeral Directors had jurisdiction over NPS and did not shut the company down in time to prevent the current crisis. In a response, a group of the injured funeral homes are calling for the transfer of preneed oversight to a new “commission” comprised of nine funeral directors and a consumer advocate. If this proposal constitutes the sum total of changes to be made to Chapter 436, it represents nothing more than putting lipstick on a pig.

Missouri’s State Board was never provided the tools it needed to effectively regulate the preneed transaction. Chapter 436 was intended to keep the preneed door open by establishing minimal contract and trusting requirements, without providing an effective mechanism for oversight. The State Board was never granted rulemaking authority to even address the transaction as it evolved over the years. Understanding the limitations of a state budget, the State Board’s funding for oversight was also restricted by a $2 per preneed contract fee. Restrictions were also placed on the Attorney General’s office regarding attorneys assigned to the State Board.

To suggest Missouri’s problems are simply a “governance issue” is an insult to the funeral directors who have given up their time to serve on the State Board. From time to time, there have been valid criticisms about whether the State Board members have been influenced by self-interests. But, the overriding goal of the State Board member has been the advancement of the industry’s professional standards. Current State Board members may not understand the economic nuances of all variations of the preneed transaction, but how will an expansion of preneed oversight from 5 funeral directors to 9 funeral directors ensure that objective?

The Chapter 436 review process opened last summer with the question of whether preneed oversight should be moved to an independent state authority. There are advantages and disadvantages to putting preneed oversight under an industry board. The major advantage is that the industry board should be more familiar with a complex transaction. While independent preneed regulators can be very competent (Iowa for example), more often than not, the independent preneed regulator finds the transaction as confusing as any other person. The spokeswoman for the Illinois Comptroller’s Office has acknowledged as much.

Missouri’s legislature should leave preneed oversight with the State Board and focus its attentions on providing that entity the authorities needed for effective oversight

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Consumers and funeral directors are asking their state regulators how they let the National Prearranged Services collapse to happen. With the exception of Missouri and Iowa, the NPS preneed contract was generally an insurance-funded transaction, and state insurance regulators are taking most of the heat. It is a very different story in Missouri, as witnessed by two competing reform bills: Senate Bill 1 and House Bill 853. For Missouri, NPS used a trust-funded preneed contact (that was subsequently invested with Lincoln Memorial policies). As a consequence, Missouri legislators have made higher trusting requirements and heightened fiduciary responsibilities their top priorities for both bills.

Missouri’s Chapter 436 was written before Rev. Rul. 87-127, when trusts were king. The law also reflects the historic perception of the guaranteed preneed contract (one that is shared by the Internal Revenue Service and the Securities Exchange Commission): the transaction is a sale of goods and services by the death care company.

Chapter 436 allows the preneed seller to retain the purchaser’s first payments until 20% of the sales price has been collected. A 20% sales expense retention provides smaller funeral homes the funds required to maintain a program to compete with larger operations, including the national companies. All subsequent payments must then be deposited to trust. The law was intended ensure there were sufficient trust funds for the funeral home’s “costs” at the time of performance (in contrast to the amount the consumer would have to pay for the funeral at a future date). Consequently, Chapter 436 allows the seller to also withdraw realized income to the extent the trust’s market value equaled the deposits made to trust.

What distinguishes Chapter 436 from most other permissive preneed state laws (such as Iowa) is the public policy decision to require income accrual. By requiring the trust to accrue income, these states have placed a ‘cap’ on the seller’s recovery of preneed program costs. Their message is that the seller must make do with the front-end retention of payments. These states still view the preneed transaction as a sale of goods and services (allowing the recovery of the sales expense costs), but they will not allow the preneed seller to recover other operating expenses from trust funds intended for future performances. In this respect, SB 1 and HB 853 are similar. While both would require the accrual of trust income, only the Senate bill recognizes the preneed contract as a sale of goods and services.

In an attempt to enhance consumer protection and preserve the funeral home’s ability to offer a trust-funded preneed program, SB 1 would raise Missouri’s trusting percentage from 80% to a hybrid 85%. This trusting change will have the greatest impact on small funeral homes with dedicated salesmen and the larger, proactive independent funeral home/cemetery operations.

As the retention percentage is reduced, economies of scale will make it more difficult for small operators to maintain a separate program. While the larger proactive preneed program may have the volume of sales to offset the loss of 5%, they must contend with SB 1’s ‘pro rata’ recovery of sales expense.

The retention of the sales expense from the first payments simplifies the procedures for compensating a program’s salesmen. Missouri’s SB 1 recognizes this issue in that it authorizes the first 5% of the sales price to be retained. While SB 1 allows the seller to collect an additional 10% of the contract sales price, it must do so pro ratably from each subsequent payment. This pro rata approach imposes a greater administrative burden on the seller, contributing to the costs of the preneed program.

In contrast to SB 1, HB 853 requires 100% of a purchaser’s payments to be trusted. The bill’s advocates claim the preneed funds belong to the purchaser, not the funeral home, and consumer protection will be enhanced. Essentially, the bill’s supporters are re-defining the trust-funded preneed contract as a transaction of accommodation to the preneed purchaser. Funeral homes will be required to provide program administration and tax advantages that the consumer cannot otherwise obtain from a bank.

Deprived of a source of funds to offset preneed program expenses, proactive sellers will be forced to utilize insurance funded programs. While insurance offers cost advantages to the younger consumer, many typical preneed purchasers may not qualify for insurance, or may not be able to afford the required premiums. In the end, HB 853 will reduce the preneed options available to consumers and the industry.

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John Duggan has a point, and that’s what concerns regulators in Illinois, Missouri and Texas. Who will be blamed when the consumer does not get the benefit of their preneed contract?

While the overwhelming majority of NPS’ preneed contracts will be honored by the funeral home named in the contract as the “provider”, it is not because of regulators’ threats. Most funeral directors cannot afford to abandon their preneed families. The same can be said for the IFDA members and their preneed contracts. But there will be some funeral directors who eventually decide that they cannot afford to honor those contracts. To protect the consumer, the regulator will be called on to enforce a contract that should exist between the funeral home provider and the third party preneed seller.

Many funeral homes rely upon third party sales organizations to provide preneed documents, administration, sales forces and economies of scale. While funeral directors typically relate the term “third party preneed seller” to entities such as National Prearranged Services, the term also includes those entities formed by state associations to service member funeral homes that do not want, or cannot afford, to maintain their own preneed operation. While this relationship involves the delegation of crucial responsibilities, regulators have discovered that the seller and provider have done little to document their respective rights and obligations in a formal agreement.

When the Texas Insurance Department took control of NPS and its sister insurance companies in early 2008, the initial press releases advised funeral directors that they were obligated to honor those contracts regardless of the circumstances. Texas authorities subsequently narrowed such statements to their Texas funeral directors because Missouri’s Chapter 436 does not have such a requirement.

NPS was notorious for selling preneed contracts in the absence of an agreement with provider funeral homes. Some funeral directors discovered these sales after the fact. To the extent NPS had authority to represent a provider funeral home, the agreement was often cursory in nature. Consequently, Missouri funeral homes have some justification for challenging the obligation to honor NPS contracts. In response, Missouri’s reform bill includes the following provision:

436.415. 1. Except as otherwise provided in sections 436.400 to 436.520, the provider designated in a preneed contract shall be obligated to provide final disposition, funeral or burial services and facilities, and funeral merchandise as described in the preneed contract.

2. The seller designated in a preneed contract shall be obligated to administer all payments made by, or on behalf of, a purchaser of a preneed contract and ensure the preneed contract is managed and fulfilled, and payments remitted, in compliance with sections 436.400 to 436.520 and as provided by the contract. 

 But what if the seller does not fulfill its obligations to the funeral home provider and the consumer? Is it fair to impose strict liability upon the funeral home provider?

Regulators, such as the Illinois Comptroller’s Office, seem be indicating that preneed regulation is a bigger, more complicated, task than what they are prepared for. In that vein, Missouri is warning funeral homes that they must assume the risks associated with third party sellers. Texas seems to think that consumers would be best served by the prohibition of trust-funded third party preneed contracts (154.1013). I disagree.

Insurance funded preneed is not an option for many elderly consumers. If faced with trust funding or POD/joint accounts, smaller funeral homes will be squeezed out of the trust arrangement by the expense of establishing and maintaining their own trust. Funeral homes will also have to comply with the seller licensing requirements.

Despite the allegations made against the IFDA, the state association trust may represent the only competitive preneed product available to the smaller funeral operator.

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The Missouri Senate Committee assigned the task of preneed funeral reform posted a substitute bill to the Legislature’s website on February 6th: SCS SB1. For those who participated in the Chapter 436 Working Group meetings last summer, this bill may seem vaguely familiar. During those meetings, the Division of Professional Registration circulated a 41-page draft proposal for discussion with industry representatives. However, discussions regarding the proposal bogged down when industry members could not agree over several issues. Eventually, the Working Group issued a “Recommendations” statement.

Turning back to the Division staff, the Senate committee has dusted off that earlier draft proposal and added provisions based on the Chapter 436 Working Group Recommendations. This approach is sure to revive the disagreements that derailed last summer’s meetings.

With the NPS failure as a backdrop, the Missouri legislature will have little patience for the internal bickering that has marred prior reform efforts. While SCS SB1 has some legitimate flaws, the status quo is no longer an option.

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In terms of the toxic NPS fallout, Texas ranks a close second to Missouri.  In response, the Texas Department of Banking has released a legislative proposal aimed at closing what it perceives are the loopholes in Chapter 154 of the Texas Finance Code. 

To facilitate discussion of the issues with death care operators, insurance companies and fiduciaries, the Department of Banking released an Explanation of Intent of Proposed Changes.   A few of the DOB issues include:

• Putting cemeteries on notice that they could be defined as a "funeral provider".
• The seller/permit holder must exercise reasonable controls over contract administration.
• The elimination of third-party preneed sellers.
• A minimum net worth of $100,000 for permit holders.
• A standard information brochure that covers both forms of funding.
• Income allocation requirements for non-guaranteed items.
• Distribution documentation.
• A new guaranty fund.

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The IFDA master trust turned a new page today, and for participating funeral homes, the first step in a long recovery process.  With the appointment of Merrill Lynch Bank & Trust as a temporary trustee, the association begins the process of looking for a permanent trustee.  The appointment also coincides with the trust's accounts being put on a mark-to-market basis. 

The mark-to-market approach taken by the IFDA master trust will mean that the trust's value will be allocated among the preneed contracts each month. Until the benefits of key man insurance purchased by the master trust are realized, funeral directors will be servicing contracts for far less than they were promised.  It was not clear from the Q&A circulated to funeral directors whether insurance proceeds will be allocated to preneed contracts serviced while the actuary study is being performed. 

Funeral directors who left the IFDA master trust for NPS must feel whipsawed by these circumstances.  

Missouri funeral directors questioning reporting requirements being considered by the legislature should note that the IFDA reports its preneed contract values to consumers annually. 

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Part of the bad rap against preneed stems from the salesman who is prepared to say anything to close the sale. While, reputable companies build safeguards into their programs to check this behavior, there will be individuals who are prepared to bend the rules. Who should be held accountable when the agent intentionally violates the company’s safeguards? That question was raised, but not answered, during Missouri’s Chapter 436 Review Committee hearings. For some Missouri funeral directors, the issue is being presented in a context that they do not yet appreciate.

NPS’ sudden demise left an aggressive sales force scrambling to find new jobs. Some of the NPS salesmen joined established insurance companies, and others established their own insurance agencies. While some of the former NPS employees were also victims of the company’s misrepresentations, funeral directors need to appreciate that NPS did not think enough of compliance to teach it to its employees. Consequently, funeral directors should be asking whether these salesmen are receiving proper oversight from their new insurance companies.

Some of the former NPS salesmen signed on with a national insurance company that offers a ‘funeral expense trust’. That trust represents a product the insurance company can offer to consumers who cannot purchase the company’s insurance product directly through a licensed agent.

Some preneed sales entities have taken the concept a step further, and are marketing the trust in states where the insurance can be purchased as a preneed product that is independent of the funeral home. Innovative NPS salesmen now seem to have taken the concept even further, marketing the concept as a vehicle available to funeral directors who are not licensed insurance agents. It is not clear whether the sponsoring insurance company has approved of either of these modifications to the funeral expense trust.

One of the persistent rumors regarding NPS’ business practices in 100% trust states, was that the company circumvented insurance licensing requirements by effecting insurance purchases through a trust. The rumors also suggested that NPS found ways to split commissions with the funeral directors even though they are not licensed insurance agents. Funeral directors are beginning to relay similar stories, but with new insurance company names.

So, if these salesmen have formed preneed marketing programs that violate applicable preneed laws, is the insurance company responsible to the funeral director if disciplinary actions are brought against the funeral establishment license? Most state regulators will likely find the funeral director has a duty to understand the licensing requirements and commission restrictions imposed by applicable state insurance laws. Funeral directors are putting their livelihood at stake when they do not question a salesman’s explanation about how ‘we have a way around that problem’.
 

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Dear Donna,

Once the liquidation plan is finalized, and the procedures for paying claims are implemented, could we please revisit the issue of the Missouri installment contracts?

Yes, you have been patient and polite regarding my inquiries.  But, until this past Monday, I did not know how significant an issue these contracts were.  If I am interpreting Note 3 from the Statement of Assets - Explanatory Notes correctly, Missouri consumers owe $23 million on outstanding NPS preneed contracts.  As I explained in my May letter, these consumers are paying too much. 

Thanks, again.

Bill

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Concurrent with the hearing held on her Liquidation Plan, the Special Deputy Receiver posted a financial report to the Lincoln Memorial Life/NPS website. As with most financial statements, explanatory notes at the end of the report provide some insights to the failed NPS empire. While prior documents have disclosed that the companies have a deficient of nearly one billion dollars, the SDR report breaks that number down in terms of trust funded contracts and insurance funded contracts. 

Insurance funded preneed contracts account for almost $600 million of the unfunded deficit, twice the number of that for trust-funded contracts ($289 million).   The explanatory notes identify six trusts maintained by NPS. The notes identify Trust VI as that of Iowa, and the size of Trust IV would suggest that it was for Missouri. One of the other trusts may be a special account, and if one were to assume the other three are other ‘state trusts’, that would leave the other 15 NPS states as exclusive insurance funded states. There is no doubt that NPS exploited Missouri’s laws regarding trust funded contracts, but a greater harm was done to consumers through NPS' exploitation of state laws governing insurance funded contracts.

Of the NPS trusts, the Missouri deficit is the largest by far ($248 million). This number has been isolated to Missouri regulators as justification for raising the state’s trusting requirement to 100%. That argument ignores the fact that Iowa also has an 80% trusting requirement, yet only has a deficit of $23.5 million (a tenth of Missouri’s). The difference can be attributed to the difference in oversight and regulatory requirements. The argument also ignores the fact that Kansas, a state with a 100% trusting requirement, has a deficit of approximately $22 million (all of which is based on insurance-funded contracts).

Another explanatory note that may suggest that Missouri’s oversight is lacking is a note payable of $10 million owed by NPS to the Missouri preneed trust.  

Missouri’s Chapter 436 problems will not be fixed by going to a 100% trusting requirement. Oversight should be the state legislature’s top priority, and Missouri preneed sellers need to begin providing ideas and answers.  

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 While the completion of the document may have felt like a birthing process to the staff of Missouri's Division of Professional Registration, the Chapter 436 Working Group Recommendations more accurately reflects an industry position paper that has yet to be completed.   Faced with a deadline imposed by the Missouri legislature, the Division 'finalized' the Recommendations in an 11th hour meeting of the State Board of Embalmers and Funeral Directors.  The State Board meeting underscored that many industry members have yet to grasp how the preneed transaction is structured and administered by competitors.  This is best demonstrated by the State Board vote to revise the Recommendations to include the following:

·         The board recommended a 100% trusting requirement with no administrative or trustee expenses by a vote of 4-2.

 During various meetings, the issues of preneed sales expenses and trustee administration expenses having been erroneously interchanged by Committee members.  This confusion is due in part from Chapter 436 allowing all income to be distributed currently.  If the trust does not accrue income, the law requires the seller to assume responsibility for trust expenses.  Trustees normally look to trust income for administrative expenses.  If the trust has no income, the trustee is dependent upon the seller for reimbursement.  This aspect  compromises the fiduciary's duty to the trust. By its action, the State Board would perpetuate a major flaw in Chapter 436 (if trust funding is to survive at all). 

The State Board's objective is to protect the consumer, and to do so it must think comprehensively about the three forms of funding: insurance, joint accounts and trusts.   Is the consumer better served if trust funding is effectively precluded?   Of course not. 

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While approval of the SDR’s Liquidation Plan is imperative to providing funds for NPS contracts that are being serviced, and will be serviced during the next few years, funeral directors and consumers are raising valid questions about the Plan.   For the consumer who purchased a trust-funded contract from NPS on installments, the Plan fails to adequately address their situation.

Plan Paragraph 10.4 addresses the consumers who are making periodic payments on an NPS contract. The paragraph states in part:

            (ii) all payments must continue to be paid to the applicable Participating Association or else the coverage provided under the Policy will lapse; and

            (iii) the amount of the payment due to NPS (and, after assignment, to the Participating Association) may be prorated and reduced to the extent that the face amount of the Preneed Funeral Contract exceeds the death benefit face amount of the Covered Obligation.

The problem for consumers with installment contracts is that NPS charged fees that are not reflected in the “face amount of the Preneed Funeral Contract”.   NPS employed an installment plan that incorporated finance charges and a mortality expense, for terms of up to 10 years. Depending upon the age of the consumer and the term of payment, he or she may end up paying thousands of dollars in excess of the contract’s face amount. There is no justification for the additional mortality expense if the NPS trust was purchasing life insurance.

If a consumer purchased a NPS trust-funded contract on installments within the past few years, he/she may want to review the contract with their funeral director to determine whether to continue making payments. For those who have paid in more than the contract’s face amount, consumers may want to seek further guidance from the SDR about the proration language of Paragraph 10.4.

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So why is it so tough to provide preneed portability?   Because the transaction has been defined by state law as a contract between a consumer and a death care company, and federal regulators tend to agree.   When the issue has arisen in the context of federal preemption, the interests of the state regulator have prevailed on the grounds the transaction is ‘local’ in nature, and the state has an overriding interest in policing the transaction. This perception permeates federal oversight of the preneed transaction, including that provided by the Internal Revenue Service and the Securities Exchange Commission. So long as preneed is defined as a guaranteed contract for goods and services, complete portability will be difficult to achieve.

Consumer advocates view the preneed transaction as a savings account to be safeguarded until the death, and some state laws accommodate that perception. Kansas requires 100% trusting, an accrual of income and assures portability by granting the purchaser the right to designate a different funeral home to perform the contract.

However, if the Kansas contract was written by a funeral home with its own preneed trust, there has to be a trust agreement between the original funeral home and the fiduciary. Despite what the law states, the new funeral home is not bound to that trust agreement. In the absence of a trust agreement, the fiduciary does not want the responsibility of ensuring the new funeral home performs the preneed contract according to its terms. If the new funeral home seeks to have the funds transferred to its own bank, what responsibilities does the trustee have to ensure the receiving institution will accept the funds in a fiduciary capacity? (Is anyone familiar with Bremen Bank?) 

So long as the new funeral home is within the state of Kansas, the state’s preneed law could be revised to afford the fiduciary some protections. However, state law will not remedy the situation where the consumer has moved to another state. 

When faced with this situation, insurance companies protect themselves by adopting policies that restrict policy assignments. It is not that uncommon to encounter insurance companies that prohibit policy ownership by funeral homes. Insurance companies will be more lenient with funeral homes with whom they have an agency relationship.

For states like Missouri, portability faces the challenges of the seller/provider distinction and lower trusting requirements. Missouri allows preneed sold by third party entities, and requires the seller to have a contract with the funeral home or cemetery prior to marketing to consumers. In keeping with this requirement, regulators recently looked at language to improve portability. However, that result was confusing, and did not consider the fiduciary issues. The Pennsylvania State Board of Funeral Directors had similar experiences with a recent effort to address portability. 

If a Missouri contract has been trusted using the minimum requirements, the contract becomes less attractive to other funeral homes as time passes from its sales date. There may come a time when the contract becomes a liability.  Under that circumstance, the consumer will have difficulty finding a funeral home willing to accept the contract. 

The irony of the NPS failure is that the company’s program offered the consumer interstate portability that only the national death care companies could match.   But the NPS customers have not only lost the portability of their contracts, some face the prospect of their named provider going out of business. 

Steps can be taken to improve portability, but it will not be as simple as mandating a result. Increasing funding requirements and assuring insurance assignment rights will help. To overcome resistance by funeral directors, protections against ‘twisting’ could be offered. 

However, if the consumer wants complete portability, he or she will need to consider the non-guaranteed preneed contract. 

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On June 8^th, Donna Garrett, the Special Deputy Receiver for the NPS affiliates, filed with the Texas Travis County Court an application for fees. The application includes a schedule of fees that will be charged by the subcontractors to be utilized by the SDR. The filing would seem to indicate the law firm of Polsinelli Shalton Flanigan Suelthaus, PC. will be serving as the SDR’s main counsel.  

Proceedings such as last week’s lawsuit brought by James & Gahr Mortuary will contribute to the expense that must be borne by the SDR.   The $250,000 sought for fees and expense in the June 8^th Application is only the beginning.  

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The class action lawsuit brought against the NPS affiliates on Friday, June 20^th reflects the despair that some funeral directors are experiencing over the situation. Although litigation to recover assets from the Cassity Empire was inevitable, this lawsuit has flaws that need to be corrected through an organized effort brought by the states’ regulators.

Funeral homes have a legal claim for damages against NPS to the extent they have serviced NPS contracts and failed to receive the compensation promised them by NPS. Consequently, I anticipated finding this provider’s associate agreement as an exhibit to the pleading. However, the filing omitted documentation that would evidence the funeral home’s rights and obligations with regard to the performed contracts and the contracts that remain to be performed. As evidenced by the June 9^th Funeral Service Insider, NPS played by fast and loose rules when it came to their relationships with provider funeral homes. So, what are funeral homes entitled to?

The lawsuit also fails to include the consumer as a member of the plaintiff class. With regard to executory preneed contracts, the consumer has superior rights to the funeral home. Ignoring the rollover contracts, the funeral home has an expectation of performing the preneed contract when the death occurs. However, the consumer could always move to another state, or cancel the contract. Until the funeral is provided, it is the consumer who has the greater claim of damages from NPS. His/her NPS contract has no cancellation value or portability. 

The lawsuit is also troubling in the sense it presumes that whole life insurance policies were appropriate trust investments under Missouri’s preneed law. Chapter 436 is a bit ambiguous about insurance funded contracts, but with regard to trust funding, the law permits the preneed seller to retain 20% of the contract’s purchase price, and to trust the remaining 80%. Unless the purchaser makes the contract irrevocable to qualify for public assistance, the contract can be cancelled and the seller must refund the amount that went into trust. So, if the seller trusts only 80%, how can the trustee purchase a whole life policy and have the liquidity required for Chapter 436 compliance?  

This funeral home points an accusing finger at the fiduciaries, but the pleading reflects the funeral home’s acceptance of the trust holding whole life insurance. A question regulators might ask is whether the funeral home received any compensation for the insurance purchased by the trust. 

Regulators have valid excuses for distancing themselves from this lawsuit, but consumers need an independent authority pursuing their (and funeral directors’) claims against NPS.   If regulators do not recover sufficient assets, funeral homes will fail and consumers will lose their funeral promises.  

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In what may prove to be a lengthy legal proceeding, Missouri Attorney General Jay Nixon filed suit against Forever Network, Inc., an affiliate of National Prearranged Services (NPS).  While the suit may duplicate the injunctions effected by the Agreed Order obtained by the Texas Department of Insurance, consumers should take comfort by the fact Mr. Nixon has begun taking action.  

While it may be days before a copy of the petition can be obtained for review, I anticipate the pleading may share some of the same assertions and requests made by Texas.  While this duplication may be confusing to funeral directors, the difficulty regulators face in bringing proceedings against NPS is that each regulator must establish the requisite authority for the remedies sought.   For Jay Nixon and the Missouri State Board of Embalmers and Funeral Directors, Chapter 436 is full of ambiguities, making their case against NPS challenging (but not impossible). 

The Missouri regulators have a stated goal of ensuring that consumers receive the services they have paid for.  While Chapter 436 has its many faults, regulators should keep in mind Section 436.007.2, which provides:

If a preneed contract does not comply with the provisions of sections 436.005 to 436.071, all payments made under such contract shall be recoverable by the purchaser, his heirs, or legal representative, from the contract seller or other payee thereof, together with interest at the rate of ten percent per annum and all reasonable costs of collection, including attorneys' fees.

NPS aggressively marketed preneed contracts on an installment basis that incorporated vague finance charges and “premature death discount fees”.  These charges often drove the price of the preneed contract up by thousands of dollars.  Justice would taste sweet if the Cassitys' had to give it all back.   

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It is not a good sign when our regulators communicate by letter.  Friday's Post Dispatch story underscores the friction that exists among some of the regulatory agencies caught in the NPS fiasco. 

In one aspect, the letter is intended to demonstrate that the Missouri Attorney General's Office is dependent upon the State Board of Embalmers and Funeral Directors and the Missouri Department of Insurance to refer matters for investigation.   However, the letter also demonstrates the defensive posture being taken by the regulators as they prepare for the worst.

The article also underscores the inconsistent information being provided by regulators.  While the Post Dispatch indicates that NPS has a billion dollars of outstanding preneed contracts, regulators have not been willing to confirm the preneed liability or the amount of assets under their control.

With this Fall's elections, the posturing is understandable.   But, let's hope that the Missouri Attorney General has initiated discussions with the US Attorneys Office about the pursuit of the Cassitys' "suspect business practices".

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I will preface this blog entry by stating that I do not fault the Texas Department of Insurance for the Rule 11 Agreement if giving up litigation against NPS/Lincoln Memorial (and the various individuals) was the price extracted for gaining control of the companies and the preneed records.  Someone needed to take action, and I commend Texas for taking the lead. 

However, the Texas Department of Insurance has requested that I clarify my May 27th (Texas Hold'em) blog entry.   Here is their statement:

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Funeral directors will attempt to leverage the Funeral Service Insider’s report about the NPS contributions to state politicians, but they should do so with caution.

The story does not paint the entire picture of NPS’ efforts to influence the politics that controlled Missouri’s preneed industry. The amount attributed to the Missouri efforts ($168,000) seems low. Granted it does not reflect contributions made during the past two years, or those made prior to 1999, but the seven years in question cover the period when NPS’ sales seemed to have leaped (within Missouri and to other states). 

If NPS providers are going to point an accusing finger at Jay Nixon, they need to consider two issues: their need for Nixon’s help and cooperation, and the complicity of some funeral directors in the NPS impropriety. 

NPS made political contributions for a number of reasons, including the opportunity to have NPS providers appointed to the Missouri State Board of Embalmers and Funeral Directors. The funeral homes demanding action from the regulators may, for the most part, be innocent.  But when a group is found to have one or more pots calling the kettle black, the credibility of the group as a whole is undermined.

If it is not apparent, there is some finger pointing being done within the regulators’ closed circle. A potential issue in the rift among the regulators maybe the political dispute between Missouri Governor Matt Blunt and Missouri Attorney General Jay Nixon that prompted the AG’s Office to pull its staff attorneys from their day to day representation of the various state boards and agencies. This forced the Missouri State Board of Embalmers and Funeral Directors to look to the legal staff of the Division of Professional Registration, a staff that was already stretched. In reality, the NPS situation existed long before the AG pulled its attorneys, and the posturing has already begun for that issue.  

The NPS meltdown has regulators scrambling for their respective excuses. Some of those excuses will appropriately lay the blame back on the death care industry. However, NPS was an equal opportunist when it came to exploiting politicians and funeral directors. Eventually many individuals may be called upon to provide an explanation, but funeral directors and regulators would be better served channeling their current energies towards the recovery of consumers’ funds and the formulation of a program to administer those funds.  

In five months, consumers will be voting.  Will they be more receptive to excuses or explanations about the efforts already implemented to provide their funerals?

Everyone has an excuse. Write them down and put them away for another day.  

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Everyone complains about continuing education, but occasionally the concept is reinforced when a timely program provides needed insight. Such should be the case when the Missouri Funeral Directors and Embalmers Association sponsors a class on the tax consequences of servicing an NPS contract. 

Funeral directors need to understand that they do not necessarily incur a tax loss when they honor an NPS that pays less than their at-need prices. Incurring an IRS audit by improperly reporting NPS revenues would be salt to those wounds.

The MFDEA convention starts June 1^st, with a slate of classes scheduled for Monday, June 2^nd.   Continuing education is not required for Missouri licensees, but it should be. Regardless, NPS providers from Missouri have ample reason to consider attending the convention. Hearing the Missouri Attorney General’s Office address the NPS situation may be worth the price of admission.

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The Cassitys have a rearguard strategy after all.

The Texas Department of Insurance paid a price for gaining control of NPS and its sister insurance companies: A Rule 11 Agreement.   Texas has agreed to not bring litigation against the companies, or various individuals and firms related to NPS.  A very steep price, but one Texas may have felt it had to pay in order to gain control of the NPS/Lincoln records. 

The $640 million question is who will pursue the Cassitys if the NPS cupboard turns out to be bare? 

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One positive aspect of Texas appointing a “Rehabilitator” for NPS and its sister insurance companies is the emergence of a single authority over the NPS empire, a godfather so to speak. Rather, a Godmother.

Funeral directors have been chasing legislators, regulators, government officials, and judges for help. This is quite understandable when your entire preneed program was with NPS. However, the Agreed Order Appointing Rehabilitator and Permanent Injunction (“Agreed Order”) will stay all lawsuits like that brought by the Broussard’s Mortuary, a long established Texas company. 

The Agreed Order could also bring much needed focus for groups like the “Consumers Funeral Assurance”, a Missouri outfit that is soliciting support from former NPS providers. (Have you spoken with Josh about the similarities in your names? )

One valid grievance funeral directors have with the regulators’ current status quo is the payment of claims based on the contract’s sales price.   For NPS contracts sold within the past few years, the contract face does not represent much of a hardship. It will be quite a different story for the twelve year-old contract.   Now we can appreciate why NPS was offering those Triad casket coupons.  

Rather than pursue geese like the “formation of a quasi-state agency that will assist with the payment of claims”, funeral homes (or the entities that form to represent them) should channel their energies and resources towards the inclusion of their issues in the plan of rehabilitation required by Texas law.   (See ¶2.11 of the Agreed Order.) 

While funeral directors may be tempted to seek an appointment with Ms. Garrett, they would be better served by briefing the issues for her consideration. Funeral directors should be objective and honest in how they present their issues. Ms. Garrett will be taking possession of all NPS records, and ostensibly, will discover which funeral homes received loans or special commission payments. The emperor has no clothes.  

It would also be advisable to tone down the rhetoric. Regulators are probably beginning to appreciate their responsibilities for the NPS failure, but are the funeral directors? 

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Yesterday, the St. Louis Post-Dispatch ran an article that examined the history of NPS, and raised some of the questions that need to be explored in depth in the months to come.   The system failed in several states, for both consumers and funeral homes.   While most funeral homes will try to make good on the NPS promises to consumers, regulators must share in the responsibilities for what went wrong and what has to be done.

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On Wednesday, April 30^th, the Missouri Department of Insurance fired off the first salvo in the legal proceedings to recover funds from Lincoln Memorial Life Insurance Company. In an effort to prepare those affected by the NPS meltdown, the Missouri State Board of Embalmers and Funeral Directors and the Division of Professional Registration have issued press releases that explain critical issues related to this situation. The tenor of these press releases is substantially different from those previously released by other states’ regulators. Consumers and funeral directors need to review these releases carefully.   

If it hasn’t been apparent to funeral directors before now, Missouri’s filings against Lincoln Memorial Life reflect that the NPS trusts are full of term insurance policies. Some reports indicate that the policies may be lapsing soon. While Missouri Department of Insurance has filed its actions against Lincoln Memorial Life, the eventual target will be the NPS/Lincoln corporate officers and directors. Because regulators must pursue their claims through the authorities granted by the statutes governing insurance and preneed, funeral homes need to consider banding together in an action that focuses on the authorities granted to the replacement management team installed by the Texas regulators. 

The Missouri regulators and their legal staffs have been overwhelmed by the situation.   These offices were understaffed to begin with, and the magnitude of the investigation, legal proceedings and inquiries has stretched their resources to the limits. This all may make for good campaign rhetoric in the upcoming fall elections, but the industry needs to take actions to help recover improperly diverted funds. 

The rumors of law firms offering to initiate class action lawsuits have already begun to circulate. But, most funeral directors probably appreciate that building a coalition to preserve the NPS assets and working towards an equitable division of the proceeds would better serve their interests.   To be fair, consumers need an explanation about the third party preneed transaction and their exposure for the NPS failure. 

The majority of preneed contracts are between the funeral home/cemetery and the purchaser, wherein the funeral home/cemetery is the primary obligor. The essence of the contract is two promises: the purchaser to pay a specific amount of money and the funeral home/cemetery to provide certain described services and goods when the purchaser (beneficiary) dies.   

NPS is (was) a third party preneed seller. Funeral homes and cemeteries use third party sellers for a handful of valid purposes. Often, smaller death care companies may not have the volume of preneed sales to justify the expense of contracts, administration and compliance and so they contract with third party preneed sellers. Some states require the death care company to be the obligor of the preneed contract, but many do not. In states where law requires the death care company to be the obligor, the third party seller acts in an agency capacity to the funeral home and cemetery. It that situation, the death care company has an obligation to honor the contract regardless of most circumstances (like the failure of the trust). 

However, states such as Missouri and Texas, allow the third party seller to be the obligor of the preneed contract. In these types of preneed transactions, there are four sets of promises: the purchaser to pay money to the third party seller, the third party seller to cause the funeral home to provide a funeral by paying it money, the funeral home to provide the funeral, and the third party seller to pay money to the funeral home. However, the terms of the payment between the third party seller and the funeral home are not generally disclosed in the preneed contract, but rather in a separate agreement between the third party seller and the funeral home/cemetery (called an associate agreement or provider agreement). 

NPS used a multitude of different preneed contract forms and associate agreements (most of which were infamous for their ambiguity or brevity). NPS relied upon these ambiguities to transfer preneed contracts from one funeral home to another funeral home if the circumstances benefited NPS. Consequently, the agreements were intended to be difficult to enforce, which cuts two ways.

Regulators did not seem to appreciate this fact when early press releases were issued to calm consumers. Those press releases suggested that funeral homes would have to honor their NPS contract “pursuant to their terms”.   While funeral directors cannot afford to walk away from their families, regulators need to follow the lead taken by Missouri’s State Board of Embalmers and Funeral Directors by being more forthright with consumers.   If the NPS/Lincoln proceedings take years to resolve (instead of months), the parties will need an understanding of their respective rights and obligations in reaching fair and equitable settlements.

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Certainty? In this world nothing is certain but death and taxes.

Benjamin Franklin

The “collapse” of National Prearrangement Services comes as a shock to both the company’s clients and competitors. For the seventeen states in which NPS transacted business, regulators are scrambling to get their arms around the magnitude of the problem. NPS’ adversarial reputation will cause many regulators to move cautiously. However the capitulation by NPS to the termination of its marketing operations should cause regulators to consider whether the individuals that control NPS and its related sibling corporations have employed a rearguard strategy.

Missouri and Texas will figure prominently in regulators’ efforts to protect consumers. NPS maintains its corporate headquarters in St. Louis, Missouri.   The insurance company to which NPS funnels its preneed sales, Lincoln Memorial Life, is a Texas company located in Austin. Accordingly, records of NPS’ preneed sales should be in St. Louis and the funds received by NPS should (hopefully) have made their way to Austin, and subject to the jurisdiction of the Texas Department of Insurance (TDI).  

However, the news from TDI has been a bit confusing. On April 9^th, TDI issued a press release that disclosed that an Agreed Order had been entered into with NPS. The press release states:

The TDI-issued Hazardous Financial Condition Order requires the companies to establish a plan to pay policyholder claims and to address existing contracts.

"While every effort was made to secure the companies and return them to normal operations, the decision was made to take this regulatory action," said Texas Insurance Commissioner Mike Geeslin. "As we move forward, our goal is to use every law on the books to protect consumers, coordinate with other regulators and states and - most importantly - keep all parties informed as issues develop."

"It is imperative that we work closely with NPS and the funeral providers to ensure all Texas consumers receive their prepaid funeral goods and services as originally promised," said Texas Banking Commissioner Randall James.

For years, these companies have been dependent upon new sales (and trust transfers) for revenues to meet promises made to funeral homes. Consequently, TDI’s assurances about returning these companies to ‘normal operations’ rang hollow when news of NPS’ termination of its sales personnel was leaked. A day later, the Kansas City Star reported that a Kansas lawyer had taken “control of the company Tuesday as action manager of behalf of Texas,…”    So, what is going on? 

The lawyer referenced by the Kansas City Star article has experience with insolvent insurance companies, and so one explanation could be that Texas is preparing to take control of Lincoln Memorial Life. 

With NPS being deprived future sales, the Lincoln Memorial assets may be the only source of payment for hundreds of thousands of consumers. Texas reported 39,000 policyholders, and Missouri reported 46,000, and while these two states may account for a substantial portion of NPS’ business, there are 15 other states with NPS sales.

 With information in such short supply, one must be careful not to read too much into these press releases. But each seems to place emphasis on “Policies” and “Policyholders”. There seems to be an assumption (or at least a hope) that each NPS sale ended in a Lincoln Memorial policy. Yet, many of us know that NPS aggressively pursued trust rollovers that included questionable records for the preneed contracts involved. With regard to those transactions, it is unlikely that purchasers were ever contacted. The question then becomes what NPS/Lincoln did with the funds from their trust rollovers? 

To know just how deep the NPS waters are, Missouri is key to obtaining NPS and its corporate records. On April 9^th, the Division of Professional Registration issued a press release that advised:

Funeral directors are cautioned to ensure they maintain adequate records and evaluate any preneed arrangement sold on behalf of their funeral establishment.

On April 11^th, The Kansas City Star reported the following comments:

“We want people to know we are working to safeguard their interest,” ……….. “We’ve stopped the flow of business to look at what’s going on. Our concern is that they get what they paid for.”

While terminating NPS’ authority to enter new transactions had to be its first priority, Missouri must now determine how it can best protect all consumers, not just those from Missouri. If there is any doubt about the trust rollover transactions, Missouri needs to take prompt action to secure NPS’ corporate records. 

Which brings this post back to its introductory muse: has NPS been sacrificed as some sort of rearguard maneuver?  

We can hope that NPS will take all actions necessary to provide assurances to its policyholders, including cooperation with Missouri’s regulators. But if push comes to shove over records that document the company’s money trails, NPS may resort to its true colors when responding to Missouri’s requests. Funeral directors must prepare for that potential conflict.

All funeral homes that have NPS contracts should begin an inventory of their paperwork.   For funeral directors that participated in an NPS trust rollover, the inventory should include documentation regarding the application of the trust funds. If their records do not include such documentation, funeral directors need to consider making an immediate written request to NPS. An even tougher (but necessary) decision may be whether to copy that request to your state preneed regulator. 

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NPS, beleaguered by state regulatory proceedings in Kentucky, Illinois, Ohio, Texas and Iowa, has called it quits. 

NO MAS! 

ENOUGH! 

Much to the surprise of industry leaders, NPS has suggested it will do what's in the best interests of the consumers.  Could this mean a refund to everyone?

April Fools Day!  

If anything, NPS is a fighter, and will battle each of these states.  Does NPS have problems?  Sure.  The insurance in the trust scheme has had competitors mad for years, and for good reason.  Does NPS' problems make it vulnerable to the funeral homes it contracts with?  Better go read those associate agreements.   The Funeral Service Insider suggests funeral homes could be taking the hit if NPS fails.  That may not be the case.  Nor is FSI's source on point when suggesting that the purchaser money that NPS collects is also the funeral home's money.   Funeral directors need to start reading those NPS contracts to determine if they are an 'obligor'.   Frequently, NPS associates are agreeing to provide the described funeral when they are paid pursuant to the terms of the agreements (note: plural..... agreements, you need to read more than the preneed contract). 

The consumer is the one most exposed by a possible NPS failure.  And if that were to happen, it would also be catastrophic to the industry's integrity, and the arguments against federal regulation.

But, it is a little early to be giving NPS any final rites.  Industry leaders need to take a calm approach to the situation, and avoid contributing to the rumor mill.  Consumers need to contact their state regulators to obtain more information about the safety of their funds.  Funeral directors need to get out those associate agreements, and begin to read.

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