The Cassity shell game may have came to an end this past week when aFederal judge ordered the seizure of NPS computers and 260 bankers boxes of records. Taking a page from a Six Feet Under script, NPS officers sought to conceal their misdeeds by hiding records and computers in crypts located at two of the Forever Cemeteries controlled by the Cassity family trust. From the tenor of the Court’s rulings, the judge did not find much humor in this script. NPS providers can hope that the Federal judge presiding over Mr. Cassity’s sentencing appearance will have a similar reaction to these extenuating circumstances
I have only scanned Doug Cassity’s plea agreement once, but two issues jumped out from that document. The plea agreement is based on the US Sentencing Guidelines, and Page 28 of agreement explains that the Government and the defendant did not agree as to whether guidelines relating to economic losses should be applicable to Mr. Cassity. If those guidelines were to be applied by the court, Mr. Cassity reserved the right to challenge any ruling that would extend his sentence beyond 115 months. The other issue regards a provision titled “Forfeitures” (Page 33). The Government only has approximately $3.7 million of Cassity assets subject to forfeiture.
How will the court evaluate the fact that less than 1% of a stated loss of $400,000,000 has been seized from Mr.Cassity’s assets, and that he successfully precluded that loss from being included in his plea agreement? A recent Rueters article suggests that the sentencing guidelines regarding white-collar fraud are often viewed as advisory rather than mandatory. And, Mr. Cassity has to be uncomfortable with the fact he will be standing near his investment advisor, and Mr. Wulf’s potential sentence of a few hundred years.
The jury did not buy the Wulf defense, and now the former NPS fund manager faces a much, much longer prison term than Doug Cassity. To get a better understanding of the positions taken by the prosecution and the defense, we will seek briefs and jury instructions. However, the US Attorney’s press release gives some hints at what arguments were used to persuade the jury. The second paragraph of the press release states:
Wulf was appointed in the 1980's to serve as the independent investment advisor to the preneed funeral trusts established pursuant to Missouri statutes by National Prearranged Services, Inc. (“NPS”). As the trusts’ advisor, Wulf was responsible for protecting, investing and managing the trusts’ assets, which included more than $150 million paid by customers who were told their funds would be kept safe until the time of need.
Two words jump out at this author: protecting and managing. The US Attorney argued that the fund manager had duties beyond providing investment advice. So, when NPS requested his consent to certain trust distributions, Mr. Wulf’s duty to protect and manage the trust assets required actions that he did not perform. At first blush, the prosecutor’s standard for the death care fund manager would seem substantially higher than compliance with either the prudent man rule or the prudent investor rule.
David Wulf may stand alone in the crosshairs of the criminal prosecutors, but his fate will impact the NPS preneed trustees (and possibly other registered investment advisors who manage death care funds).
Mr. Wulf had a situation that is unique from what existed in Illinois, Wisconsin, and Tennessee, but is familiar to other death care funds. Mr. Schainker was an employee of Merrill Lynch, which proved to be the deep pocket for the IFDA losses. The Hull brothers were employees of Smith Barney, which has been alluded to by the WFDA Receiver as one of those parties with liability exposure. (The same Smith Barney that had relationships with Mark Singer, the Clayton Smart advisor.) But, Mr. Wulf’s name has not been associated with any Wall Street brokerage firm. Rather, he seems to have been an ‘independent’ asset manager who relied upon his own reputation (or connections) to obtain clients, and only bound by the duties imposed by the type of securities license that he possessed, Missouri law and the contract he had with NPS and the preneed trustee. Knowing that Mr. Wulf has shallow pockets, prosecutors will seek to define the investment advisor’s duties under Missouri such that Mr. Wulf had responsibilities to both funeral homes and consumers. For this to be something other than an academic exercise, the government attorneys must show that NPS’ preneed trustees also shared Mr. Wulf’s duties to the funeral homes and consumers. If the government attorneys prove successful, preneed trustees that have delegated fund management should take note.
Once again, I have spoken too quickly.
After lamenting to the Memorial Business Journal that the NPS plea bargains will deprive consumers and the industry the opportunity to hear how Doug and his crew perpetrated so many frauds, the sole remaining NPS defendant may grant my wish. As the Funeral Service Insider reports that Herr Wulf, even at the risk of life in prison, vows to fight the charges.
I was only following orders!
While the following statement will garner argument from the plaintiffs in the NPS civil trial scheduled next year, Missouri’s infamous Section 436.031 authorized a preneed seller to designate the preneed trust’s investment advisor, and the trustee was relieved of all liabilities for investment decisions. Herr Wulf will take the stand and declare 1) he had a different fiduciary standard than that of the preneed trustee, and 2) that his investment decisions satisfied the requirements of the Prudent Man Rule. When the prickly questions regarding the definition of the fund manager’s client are raised, and whether that includes the consumer and/or the funeral home, Herr Wulf will declare that NPS (Doug) was his sole client and that he was following orders. Unlike the original Nuremberg Trials, this tribunal can call the source for those orders to testify. The world may yet get the opportunity to see Doug squirm and sweat.
(Excerpts from the Memorial Business Journal and the Funeral Service Insider are reprinted with the understanding I will promote that readers should subscribe to each. Please refer to my blog when you do so.)
This was not the ending that most expected. After decades of playing shell games with regulators and funeral homes, Doug Cassity accepted a plea bargain rather than go to trial. Brent Cassity also accepted a plea bargain, and the St. Louis Post Dispatch reports that attorneys for one of the remaining defendants were scurrying to the prosecutors before the deal was set to expire on July 3rd. Having run out of shells, Doug Cassity will now try to parlay his cupboard into a reduction of the maximum prison time of 115 months he faces. By now, federal prosecutors have determined that what assets remain in the Cassity cupboard belong to consumers and funeral homes, not any individual with the Cassity name. The industry will wait to see if federal prosecutors can turn the favor on Doug Cassity and play a different type of shell game.
For his full cooperation towards restitution, prosecutors could offer Father and Son Cassity a nicer and safer Federal penitentiary than the one in Florence, Colorado. To leverage their cooperation, prosecutors should also provide the Cassity duo the rules to surviving in a federal prison.
Offering either Cassity time off as exchange for restitution assets would be an insult to both funeral homes and consumers. The maximum time Doug Cassity faces is 9 years and 7 months. The prosecutors reference the NPS fraud at $600 million, but the actual loss to funeral homes is much higher, and will only increase as each year passes. Funeral homes and consumers will be dealing with the Cassity fraud much longer than 9 years and 7 months. And it is crucial that the public understand that a large percentage of these losses are voluntary on the part of funeral homes. As we have explained in prior blog posts, NPS was the primary obligor under many of the contracts, and many funeral homes are eating the losses voluntarily (regardless of what some regulators have said).
While funeral homes would welcome whatever prosecutors can recover from Doug Cassity, it will only be a drop in the bucket of losses incurred. No one will trade those drops for a day off for Mr. Cassity.
On January 14th, Missouri Governor Jay Nixon will be sworn in for his second term, and we are wondering whether the Governor’s plans for 2015 are influencing the direction of Missouri’s preneed reform. With commentary such as that published by the St. Louis Post Dispatch, the Governor may have his eyes on a 2015 campaign for national office. At a minimum, Governor Nixon could be targeting an old rival’s U.S. Senate seat. Either way, the Governor faces a nagging situation with NPS, and may feel compelled to accelerate preneed reform and deflect the criticism that has persisted for almost five years.
When National Prearranged Services collapsed in 2008, NPS funeral providers were especially critical of how then Attorney General Nixon settled the 1991 NPS lawsuit. The Attorney General’s office responded that they did the best possible with the weak enforcement powers provided by Chapter 436. Missouri’s Republican administration countered with a review committee formed for the purpose of finding industry consensus for preneed reform. But, the industry struggled to agree on key issues, and the State’s regulators took the lead in drafting Senate Bill. No. 1. In 2009, a newly elected Governor Nixon inherited the NPS fallout and a prior administration’s effort at preneed reform. Now four years later, the NPS fallout has somewhat abated (but not resolved), and there isn’t much to show in terms of preneed reform.
In contrast to the mortgage crisis or the state budget crisis, the NPS situation will not benefit from the recoveries of the nation’s economy or the financial markets. The Cassitys’ emptied the cupboards, and funeral homes are dependent upon the fixed recoveries negotiated with the state insurance guaranty fund. Most NPS providers are finding ways to cope, but one industry group persistently reminds the Governor and legislators of their discontent. The Governor would like to counter their criticism with evidence that preneed has been made safer under his watch, but it can take years to implement effective reporting and examination procedures.
As we noted in July 2011, a sudden increase in the number of financial examinations suggested that the Division was being pressured to accelerate the process. Shortly thereafter, the Division staff also began to press the State Board to define the insurance assignment as a preneed contract. The State Board and the Division staff disagreed on the insurance assignment issue, and frustration began to develop as the issue was pressed in subsequent meetings. That frustration culminated with a December 12th unanimous vote by the Board members to define insurance beneficiary designations as a preneed contract, but a preneed contract that would be exempt from the $36 preneed fee. Division staff warned that the distinction may not be legal. Within hours of the vote, the Governor’s office announced a Board appointment to replace Todd Mahn, the Chairman who had called for the vote.
The Governor’s website for Missouri’s Boards and Commissions states
"I am always looking for qualified, energetic applicants to serve on Missouri's 200-plus boards and commissions. Please spread the word. I would greatly appreciate it if you would encourage your colleagues and friends to review the vacancies and complete an application."
While this author has disagreed with some of the positions taken by Mr. Mahn, I do not question his commitment to the industry, or to the State Board. Nor did the former Chairman lack for enthusiasm and energy while serving the Board. But, rather than replace a Board member with known health issues that was serving on an expired term, the Governor replaced the younger Chairman.
It may not have been the Governor’s intent, but the appointment could be taken as message to State Board members to ‘get with the program’. But the Governor, and the Division, risk losing the confidence of both the Board and the industry. Someone has lost sight of the first issue discussed at the 2008 legislative meetings: who should have jurisdiction over preneed. Several state agencies attended that meeting, and none expressed any interest in assuming jurisdiction over the preneed transaction. As explained in a 2009 post, financial and insurance regulators often struggle to provide effective preneed oversight because they tend to focus on the ‘backend’ of the transaction (that part of the transaction they are most familiar). The front end of the transaction can take many different forms, which can push the transaction outside the normal scope of the agency’s jurisdiction. (For example, the Nebraska Insurance Department has jurisdiction over preneed sales, which includes trust funding.) When State Board members ‘stepped up’ in 2009 to retain jurisdiction (and demonstrate that the industry could provide meaningful self regulation), a collective sigh could be heard from the Missouri Division of Finance and the Missouri Department of Insurance. The Missouri legislature signed off on State Board jurisdiction, and in doing so made a trade off: reform would rely upon the collective experiences and training of six State Board members instead of an appointed department official. Governance by a board will never be the most efficient or expedient path to action.
In SB1, the State Board was given the task of protecting consumers against another NPS by developing procedures for preneed reporting and auditing. However, the Board is dependent upon the Division of Professional Registration for staffing, legal counsel, funding and reporting administration. Together, the Board and Division crafted a mission statement for the financial examinations that was to be the cornerstone of Missouri preneed reform. From this observer’s perspective, the State Board members never understood how the insurance assignment fit in to that mission statement. Explanations given to the State Board were unpersuasive, leaving an industry to wonder whether the issue was fee driven.
It may have taken the State Board a year to reach an agreement on the insurance assignment issue, but we believe the Chairman made the right call. This issue had a greater importance to the Division than it did the State Board, and there is speculation that the $36 fee, Chapter 208 and the state budget played a factor. Regardless, a resolution was needed so that the Board and the staff could turn to more substantive reform issues, including whether SB1 provides sufficient audit powers and protections. If the Division can look no further than the funeral home’s records, would SB1 have even stopped NPS?
On December 12th, a Missouri coalition of NPS preneed providers will have a second opportunity to state their case for legislation to establish a NPS recovery plan. As we noted back in September, that coalition should anticipate a tepid reception from the State Board of Embalmers and Funeral Directors (and much of the Missouri funeral industry). Funeral operators may be sympathetic to the harsh economic realities of the guaranty fund’s ‘fixed recovery’, but few operators perceive how those future financial losses are ‘their problem’. Legislators cannot be as dismissive because the coalition is warning that it is a matter of time before funeral homes start to fail, and when that happens, consumers will ultimately suffer the financial loss. Not knowing whether two funeral homes or twenty funeral homes are at risk, the legislature gave the coalition a hearing to present a plan. The details remain vague, but it has been reported that the plan calls for a “mandated” preneed trust. If those rumors prove accurate, the plan has two major hurdles that could block its takeoff.
In concept, a state wide, cooperative preneed trust could provide financial relief to the NPS provider. A master trust could provide participating funeral homes the economies of scale to reduce administration expenses and increase investment performance. As a collective group, the NPS providers may be able to achieve a return that not only offsets the cost increases of the future preneed business, but also some of the costs of the NPS contracts yet to be performed.
But, any thought of using investment returns of future business to fund old business would have to be closely regulated. The trust cannot take investment returns from Funeral Home A contracts and allocate them to Funeral Home B contracts. Nor can the trust take investment returns from non-guaranteed contract a001 and allocate them to NPS contract b002. With the proper administration, the investment return of Funeral Home A’s new guaranteed contracts (or old Pre-SB1 guaranteed contracts) could be split with Funeral Home A’s NPS contracts. Such a split would occur only after the proper income/expense allocations have been made to originating accounts. Under Missouri law, the consumer of one of those new accounts could chose to designate a new provider, and transfer the entire account value (including the amounts allocated to the NPS contracts) to a new trust. Consequently, the level of administration required for such allocations would be complicated. If the NPS recovery plan should seek to short cut that administration with a fixed rate of return (and using excess investment returns to fund the NPS contracts), then the plan should be rejected.
The other hurdle to takeoff is the plan obtaining the requisite trust assets for economies of scale. The rumor is that the NPS recovery plan would require all Missouri preneed sellers to participate in the trust. (If mandatory participation can be required for the Obama health plan, then it can be required for the NPS recovery plan.) Kansas regulators floated a similar idea a few years ago and quickly withdrew the suggestion after hearing the initial response from operators.
Per capita, Missouri funeral directors were hit hardest by the collapse of National Prearranged Services. And those funeral directors who suffered the greatest losses continue to demand help from the State of Missouri. Although Missouri re-wrote its preneed law just 3 years ago, the Legislature begins hearings today on whether more legislation is needed.
With the economy as it is, the NPS providers may not find a receptive audience in Jefferson City. Finding a receptive audience among other funeral directors can even be difficult.
When news of the indictment of 6 National Prearranged Service officers was reported last November, many newspapers picked up the AP version that included a quote from the Internal Revenue Service criminal investigator. The fact is that the Federal investigation of NPS involves investigators from the IRS, the FBI and the U.S. Postal Inspection Service. An FBI press release regarding the NPS indictments includes comments from investigators with the three Federal agencies. To understand how NPS’ actions triggered the jurisdiction of the three agencies, a 2009 FBI press release concerning the indictment of Randall Sutton provides an explanation of the underlying facts.
The main thrust of the IRS investigation will be to determine whether the NPS officers committed income tax evasion with regard to what they individually received, or with regard to what the company received. The investigation will need to determine how the distributions from insurance, and from trusts, should have been reported by NPS. The investigation will also need to examine how NPS’ sister corporation, Lincoln Memorial Life, reported its income. And, the investigation will look at how the preneed trusts controlled by NPS reported their income.
Shortly after the Federal investigation of NPS was initiated, the Springfield Journal-Register reported that a Federal investigation of the Illinois Funeral Directors Association master trust had been initiated. As with NPS, Federal investigators will look closely at whether the reports mailed to funeral homes, and the statements mailed to consumers, were fraudulent, and thereby, violated mail fraud statutes. However, another line of investigation will be whether the master trust violated the Federal tax code.
What does the IRS’ role in these investigations mean to funeral homes and consumers? If these entities failed to accurately report income, the IRS (and state authorities) will view the unreported income as lost revenue to government. Preneed trust income must either be reported to the consumer or taxed by the trust. NPS trusts may have had annual tax liabilities in the tens of millions of dollars. No small potatoes considering the plight state coffers currently face.
Consequently, consumers and funeral homes may see taxing authorities become more aggressive in the enforcement of preneed income reporting requirements. With fewer agents due to budget constraints, the IRS may begin promoting its whistleblower program. If the situation reported this past weekend is an indicator of the future, non-compliant preneed companies may have more to fear from the disgruntled employee than being selected for a random audit by the IRS or state department of revenue.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The Special Deputy Receiver for NPS recently reported the company’s “negative net worth” to be just short of one billion dollars. Rightfully, regulators are looking at the NPS fiduciaries for culpability in the losses that will be sustained by consumers and funeral homes in the years to come. In the meantime, Missouri state officials are working with industry representatives to reform Chapter 436. As they consider how to better safeguard consumers’ funds, regulators and legislators need to appreciate that preneed sellers and fiduciaries have overlapping responsibilities that are affected by a state’s trusting requirements.
In states with lower trusting requirements, the preneed seller typically assumes responsibility for individual preneed contract accounting. Besides the ability to report to consumers, this function is also crucial to the fiduciary’s income tax reporting. In states with higher trusting percentages, the trust often assumes greater responsibilities for the accounting and reporting functions.
Historically, preneed laws have restricted preneed trust expenses to the fee that was typically charged by banks or trust companies for estate planning business. Some state laws also restrict the trustee’s ability contract with the preneed seller for administrative services. While restrictions are needed to avoid a circumvention of the trusting requirements, more latitude should be afforded the fiduciary. In exchange, preneed sellers and fiduciaries should be required to make disclosures about those who provide the trust services, and the fees paid for the various services.
The Texas Department of Banking and the Texas Funeral Directors Association broached these issues ten years ago. In Opinion 98-15, the TDOB found that the preneed trustee fees could be used to pay for marketing expenses, outside recordkeeping for preneed contracts, and investment advice. (It is generally recognized that the trustee can incur expenses for trust accounting, legal expenses and tax reporting on behalf of the trust.)
Eventually, Texas may review its preneed law in light of the fraud committed on its consumers and funeral directors by NPS. I suspect NPS exploited the Texas provisions allowing for a depository. Before eliminating the authority to use the depository arrangement, the Texas legislature needs to appreciate the difficulty the industry has in attracting quality fiduciary services.
Allowing the trust to bear the expense of compliance does not come without the risk of abuse. Services must be necessary to the trust, and reasonable in cost. One check against such abuse would be the requirement that services must be performed pursuant to a contract with the fiduciary. Transparency of the relationships among the parties, and the fees paid could serve as another check. The IRS will likely require such transparency within the next few years as fiduciaries are required to ‘unbundle’ their fees for income tax reporting purposes.
Eventually, we may see death care fiduciary fees being broken down by the following services:
Asset management (investment)
Sub account administration
Regulatory and consumer reporting
Ten years later, the TDOB opinion may be dated in terms of what constitutes a reasonable fee. Sub account administration can run as high as 85 basis points. Asset management fees will differ on the manager’s expertise, and 50 basis points is a fairly common fee. Tax reporting expenses can differ substantially based on the diversification of the trust assets. Distribution oversight may require periodic examinations, and the expense that accompanies on-site reviews. Periodic statements to consumers and regulators will require administrative enhancements. However, economies of scale are crucial to minimizing these costs, and pooled administration will be key to providing the requisite economies of scale. Several years ago, the Office of the Comptroller of Currency recognized the role national banks could play in meeting the needs of the death care industry.
The death care trust is a different breed of animal from a bank’s staple trust business of estate planning. Consequently, legislators need to allow fiduciaries to contract for those services crucial to enhancing the compliance that the preneed transaction so desperately needs.
On June 8th, 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 8th Application is only the beginning.
The class action lawsuit brought against the NPS affiliates on Friday, June 20th 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 9th 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.
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.
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".
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:
I would like to address the comments that you posted on the Death Care Compliance Law website on May 27, 2008 concerning the Rule 11 Agreement. To clarify: the Receiver has not agreed to forgo bringing litigation against anyone. In order to avoid the expense, time, and uncertainty of a trial, the Receiver agreed not to bring suit against certain entities and individuals in Texas. The Receiver and the SDR have not foreclosed an analysis of whether it would be efficient and in the best interests of Memorial, Lincoln, and NPS to file lawsuits to recover any and all available assets. We would appreciate your including this clarification in your blog, as well a link to http://www.tdi.state.tx.us/life/cpmmemorial.html, which includes Frequently Asked Questions concerning the companies.
Funeral directors and consumers would take comfort in the fact that the Texas Department of Insurance (or any other of the various states agencies) will do what is necessary, including litigation, to recover at least a portion of the missing funds. However, it does not make sense to state that Texas regulators gave up bringing a lawsuit in Texas (as opposed to Missouri) to avoid expense, time and the uncertainty of a trial.
Texas did what it had to for the sake of gaining control of NPS and its records. If other states (Missouri) do not step up to do their share in recovering assets, then it looks like Texas has found its 'out' with regard to the Rule 11 Agreement. However, Texas should not have to go this one alone.
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.
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?
As news of the NPS meltdown began to leak last month, several proposals to reform Missouri's preneed law were hastily drafted. Not knowing the extent of NPS' problems, some reform advocates felt the need to strike while the iron was hot.
Even as the legislative session ended on May 16th, it was not clear whether any reform would be enacted. However, when the dust settled in Jefferson City, the only preneed reform enacted will prove the most prudent.
By virtue of an amendment made to Senate Bill 788 on the Senate Floor, the "Joint Committee on Preneed Funeral Contracts" was given birth. The committee will be formed with seven members from each of the House and the Senate.
The Joint Committee's tasks are to:
(1) Make a comprehensive study and analysis of the consumer and economic impact on the preneed funeral contract industry in the state of Missouri;
(2) Determine from its study and analysis the need for changes in statutory law; and
(3) Make any other recommendation to the general assembly relating to its findings.
By the time the Committee members are appointed, and hearings are scheduled in September, a great deal more will be known about NPS' business practices. However, the hearings are bound to put Missouri's entire preneed industry under the microscope. The death care industry has the summer to prepare.
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?
The dominoes are beginning to fall. The Texas Department of Insurance has disclosed that Lincoln Memorial and its sister Memorial Service Life have been put into receivership. The Department's website provides a copy of the order appointing a Donna J. Garrett as the companies' rehabilitator, and a Q&A for consumers.
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.NPS was an innovative company that grew frustrated with the fragmented nature of state preneed laws, and exploited the gaps and ambiguities of state regulation. Some will say that NPS exploited the greed of funeral directors, and this should be sufficient reason for holding funeral homes responsible for performance of the NPS contracts. While this will ring true for some funeral directors, this is too simplistic an explanation of the situation. The reality is that many funeral homes will fail if regulators do not recover sufficient assets from the Cassitys.
The Missouri preneed industry faces a long and stormy summer.
The Missouri legislature seems to be listening to regulators' requests for much needed authorities for examinations, audits and rulemaking. A draft bill providing emergency powers to the Division of Professional Registration has emerged as legislation that may be signed into law before the current session ends next week. In contrast to most bills enacted into law, this one is rumored to have an immediate effective date.
If the bill is signed into law, the Missouri State Board of Embalmers and Funeral Directors will begin to study methods for implementing the preneed inspection powers to determine whether the state's preneed problems extend beyond the NPS failure. Though meant to demonstrate the industry's overall compliance with Chapter 436, recent testimony at legislative hearings may have undermined regulators' confidence in the industry's past efforts to comply with current law.
One approach the State Board will consider is a comprehensive desk top examination of each seller's fundamental compliance with Chapter 436. Approximately 12 years ago, the State Board contemplated a broad based review process that would have sought basic information about the three methods of funding: trust, insurance and joint accounts. However, the initiative could not be pursued because the State Board lacked the authority to require compliance by licensees.
I could not attend recent a hearing where industry members testified before legislators to provide assurances that most funeral directors do comply with Chapter 436. If the description provided to me about the testimony of one well intended funeral director was accurate, funeral homes need to take a refresher on the requirements of Chapter 436. I have heard similar misstatements by funeral directors at recent State Board meetings.
I anticipate that The Missouri Funeral Directors and Embalmers Association is already working on Chapter 436 compliance courses to provide its members. Association members would be well advised to take such a course before assuming their funeral home is in compliance.
On Wednesday, April 30th, 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.
With two reform bills (HB 2469 and HB 2594) already introduced into the legislature, and two substitute proposals in the works, Missouri legislators and regulators are committed to fixing a law that allowed NPS to exploit consumers and funeral homes. However, consumers and the death care industry are both having difficulty analyzing the specifics of the various proposals. The haste with which legislation is being pressed suggests that regulators know more about the gravity of the NPS situation than what has been disclosed to the public.
Chapter 436 has some obvious problems:
- The combination of a low trusting percentage (the last 80% of payments) and the right to withdraw income currently
- Restrictions on the state board to order inspections or audits
- Minimal reporting requirements
- Ambiguity regarding deposit requirements
- Ambiguity regarding insurance funded preneed
- A lack of rulemaking authority
- An underlying assumption that all preneed contracts will be price guaranteed, and most would be trust funded
- Inadequate provisions for consumer protections when sellers or providers go out of business or are sold
- A general lack of independent oversight
What may not be apparent to legislators, and to consumers, are the many competing economic interests that exist under the “death care” umbrella. There is little doubt that legislators are getting a crash course on those interests. The various proposals already reflect certain interests of regulators, funeral homes and preneed sellers. But if legislators are only now learning the issues, how will they know which proposals are in the best interests of the consumer?
If it were not for the NPS meltdown, Chapter 436 would not be a topic of discussion in Jefferson City. Last year, Representative Meadows proposed a reform bill that was blocked before it could even be discussed. The year before, the State Board of Embalmers and Funeral Directors put preneed reform on its agenda, but the chairman, Ken McGhee, received very little support, or interest. The sudden interest to fix Chapter 436 is being driven by the NPS failure.
Preneed is a complex issue, and Chapter 436 has more faults than most states’ preneed laws. But, the NPS situation cannot be fixed if we do not know the extent of the damage. It is too late to close this barn door. Rather, the legislature must bring structure to a situation that has many competing interests. The NPS meltdown is unprecedented, and a public forum is needed so that all can understand what went wrong, and where should we go from here.
With regard to drafting preneed reform, the Missouri death care industry has historically relied upon representatives from the State Board, the funeral directors association, the cemetery association, preneed sellers and the consolidators to forge a consensus bill to submit to the legislature. This group has been referred to as the Allied Council. It has been 13 years since the Allied Council forwarded a Chapter 436 proposal to legislators. Ironically, that Allied Council effort was subverted by NPS.
Chapter 436 will be revised. However it should be done with the input of an Allied Council that includes consumers, insurance companies and the attorney general’s office.