During the summer following NPS’ collapse, the Missouri Division of Professional Registration provided crucial leadership to building the consensus required for Senate Bill No. 1.  Rushed efforts to re-write the Missouri preneed law had failed, and the Legislature then turned to the Division.  Represented by Connie Clarkson, Becky Dunn and Kim Grinston, the Division prepared a draft bill, formed a committee of regulators and industry representatives and coordinated a series of meetings.  Led primarily by Ms. Grinston, the Division promoted a frank discussion among the members of the working group committee.  One of the Division’s top priorities was to fix the law’s failure to address insurance funded contracts.  For years, the State Board had relied upon an attorney’s opinion, and the Division was puzzled by the trust requirement being imposed on sellers who only sold insurance.

Within two years of the passage of Chapter 436, the IRS issued Rev. Rul. 87-127, and several large preneed sellers switched to insurance funding to avoid onerous tax reporting requirements.  Some of those sellers saw the gap in the Missouri law, and a way to avoid paying the $2 contract fee.  The attorney assigned to the Board wrote an opinion that was the used to threaten sellers into paying the $2 fee on insurance funded contracts.  We may never know why the opinion required a trust.  The opinion was not formally issued by the Attorney General’s Office and the State Board would not release the opinion.

The Division went into the 2008 meetings seeking a very broad definition of insurance funded preneed contracts:

  1. No preneed seller or provider shall accept an assignment of insurance proceeds or knowingly allow the preneed seller or provider to be designated as the beneficiary in an insurance policy unless a preneed contract has also been issued by a licensed seller. A preneed contract shall only be required by this section if the insurance proceeds are to be used for the final disposition of a dead human body, or for funeral or burial services or facilities, or for funeral merchandise, where such disposition, services, facilities or merchandise are not immediately required and the price of such services, facilities or merchandise are guaranteed by the provider or seller.  A preneed contract written pursuant to this subsection shall be deemed an insurance-funded preneed contract and shall comply with this section and all applicable provisions of sections 333.700 to 333.900.

The working committee agreed with the need to regulate the sale of insurance funded preneed contracts, but objected to the Division’s draft bill.  The Division dropped the draft bill and shifted gears to work out a consensus on the issues.  The insurance assignment issue was kicked down the road until the September 4, 2008 State Board meeting.   The agenda for that meeting included the working group draft recommendations where certain  “Insurance Restrictions” were included.  Those restrictions drew comments from working group members who sought clarification on the Division’s intent.  The insurance assignment discussion begins on page 50 of the September 4th transcript, and the Division stated early that “if someone walked into your funeral establishment with a term-life policy that was already sold and said I want to sign these proceeds over to the funeral home, that wouldn’t be prohibited, but I would be prohibited from selling  you the term-life policy and the preneed policy together…”.  The Division’s main concern was over the sale of term life policies, not the assignment of insurance that consumers purchased from third parties.  As one working group member phrased it, the assignment of an insurance policy to the funeral home as beneficiary was more in the nature of preplanning, not prepayment.   To avoid any confusion on the issue, the Division agreed to remove the “Insurance Restrictions” recommendation from the working group’s final recommendations to the Legislature.

The Division’s handling of those 2008 meetings earned respect and trust from the Missouri funeral industry.  But that respect and trust began to erode a few years later when a different Board staff proposed a regulation to ‘re-define’ insurance funded preneed contracts to include insurance assignments.  The relationship worsened as the Division staff adopted an adversarial style with licensees and implemented policies that exceeded the Board’s authority.  The Division now has an opportunity to rebuild the industry’s trust by returning to the same honest approach taken in 2008.   No more overreaching with licensees or manipulating the State Board.

The rift between the Missouri State Board of Embalmers and Funeral Directors and their Executive Director culminated in her resignation effective June 30th.    Over the course of the past several years, the State Board drew the ire of the industry in a number of ways.   The staff implemented regulation proposals before they were officially promulgated, and continued to do so even after the Board subsequently rescinded some of those rules.  The staff screened communications directed to the State Board, including seller responses to examination reports.  Missouri’s preneed annual report form was expanded beyond Missouri law requirements not once but twice.  Funeral establishments seeking license renewals were required to provide business licenses, or proof that business licenses were not required.   A priority was given to the enforcement of DBA requirements that threatened discipline to hundreds of licensees.  Discipline was sought on a seller over the adequacy of records before the adequacy of records was defined.  The ability to amend license applications was restricted, forcing funeral homes to incur the expense of new licenses.  Funeral homes seeking advice on the Board’s unwritten policy changes were instructed to hire an attorney.  And then there were the Chapter 436 complaints initiated by the staff before the Board had promulgated the procedures rule required by statute.

The inclination of many Missouri funeral directors will be to lay all blame at the feet of the outgoing Executive Director.  But, the scope of the staff’s actions could not have flown completely under the radar screen of the Division of Professional Registration.  Through administrative and legal support, the Division assists the State Board to enforce licensing standards set out in statute and regulations.  But since the 1986 amendment of Chapter 436, the Division has, from time to time, pushed the Board beyond its statutory authorities.  Rather than seek legislation to address gaps in the law, the Division has relied upon internal legal memorandums when providing the Board direction.  By not adhering to a strict construction of Chapter 436, the Division opened a path that the outgoing Executive Director followed.  When the Executive Director got ahead of advice from counsel, she increased the Board’s exposure to litigation.

With the financial examination process now dialed back to zero, the Division has an opportunity to regain the trust of the State Board and the trust of the industry.  No more overreaching to find statutory authority.  If a gap in SB1 poses a genuine threat to consumers, then disclose the need for remedial legislation.  As we will discuss in our next post, the Division was truthful with legislators in 2008 about a critical gap in the 1986 law.  Be as truthful with the State Board and the industry about gaps in SB1.

Our first recommendation to the Missouri State Board of Embalmers and Funeral Directors is that they assume, and maintain, control over the preneed examination procedures.    The exam procedures implemented two years ago were never submitted to the Board for review and approval.  Accordingly, the examination procedures handbook should remind the staff that any change made to the procedures must be approved by the Board.  (From Page 3 of our Handbook comments, see Comment [A1])

Through Paragraph 6 of the handbook, the staff gave themselves independent authority to interpret Chapter 436 regarding the techniques that could be used to request, and confirm, information received from sellers.  Rather, we recommend that the State Board require the permissible techniques be set out in the handbook.  (See Comment [A2]).

But, the most important issue we want to stress concerns the State Board’s interpretation of Section 436.425.  While it is important to confirm that seller contracts are complying with the law, the staff has misapplied Section 436.425 over the course of the past two years.   We believe these mistakes could have been avoided if the Board’s experience had been sought by the staff before drafting the handbook.  If the Board were to have questions about contract requirements, we trust they would seek industry input before finalizing the examination procedures.  (See Comment [A3])

With an action that caught some by surprise, the Missouri State Board of Embalmers and Funeral Directors voted to suspend future preneed examinations and accept recommendations on a new process.  We have made several posts on the faults of the Missouri examination process, and now commend the Board on taking a bold action.  The Missouri Legislature passed Senate Bill No. 1 to provide the State Board exam and enforcement powers to avoid another National Prearranged Services debacle.  NPS operated years on the argument that consumer funds were not required to be deposited to trust until a preneed contract was paid in full.  Then when forced to fund its trusts, NPS siphoned out consumer funds through insurance loans and policy surrenders.  But, ten years after NPS’ collapse, the Board’s staff had not yet developed procedures for tracking consumer funds.  With our next posts, we will explain our exam recommendations in detail.

To begin reform of its preneed exam process, the Missouri State Board of Embalmers and Funeral Directors is seeking input from the industry by this Friday, June 8th.  Specifically, the State Board is requesting comments to the Exam Procedures Handbook prepared by its staff.   We have made edits to that handbook, and will provide more detailed explanations in subsequent posts to our blog.  Our first comment would be to address the staff’s error in implementing their handbook without the Board’s approval.  It is incumbent to rely upon the Board’s preneed experiences in establishing the examination procedures.  The exam procedures will also need to be adapted from time to time, but all such revisions should be approved by the Board before implemented.

When the State Board approved a new “adequate seller records” rule on April 25th, there wasn’t much discussion of the documents or reports to be maintained for performed and canceled preneed contracts.  In a sense, the Board may not need to expand beyond the FTC’s statement of goods and services requirement.  If a funeral home services a preneed contract and completes the statement of goods and services without reflecting payment, the statement could be evidence that the consumer’s preneed funds were never deposited to trust or with the insurance company.  But finding such fraud through an examination of a sampling of performed contracts would be similar to searching for a needle in a haystack.  If the Board had reason to suspect a funeral home has not been depositing funds, the examiner would need to review all serviced records for a pattern of ‘unfunded’ services.

In seeking disbursement records from banks and insurance companies, and selecting a sampling of serviced contracts, the Board staff’s agenda may have been to confirm whether funeral homes were honoring their preneed contracts.  Funeral directors have good grounds for challenging the staff.  First, there is nothing in SB1 to suggest this was a priority for the Legislature.  Second, performance records are not sufficient to explain why or when families decide to change the funeral arrangements.  When discrepancies are found between the preneed contract and the statement of goods and services, someone will be required to provide an explanation.  Pursuing such issues would be time consuming, and an inefficient use of the consumer’s $25 contract fee.

The Missouri funeral industry has haggled with the State Board for two years over preneed record requirements.  But on April 25th, the State Board scrapped the staff’s adequate record proposal, and instead, adopted a brief definition of ‘seller records’.   The State Board’s approach will afford funeral homes more flexibility in documenting the receipt of consumer funds, and the transmittal of those funds to the preneed funding agent.  To outline what could be required of funeral homes, the State Board has scheduled a two day June meeting.  The Board is seeking comments on the scope of preneed exams and the current exam procedure handbook.   If the Board is serious about providing consumer protection, the June meeting will need to include a discussion of periodic receipt and transmittal records.   While the State Board is likely to endorse a review that uses samplings, examiners will still need some form of a receipt and transmittal record that will enable them to follow consumer funds.    The following hyperlink can be used to download an example of a deposit/transmittal record that can be used by funeral homes.

It only took 15 months, but the Missouri State Board finally approved a rule to clarify what fees a preneed seller may charge when offering a guaranteed price contract to consumers.   Low investment returns from insurance and trusts forced many funeral homes to stop offering guaranteed price contracts to consumers.  Funeral homes’ cost increases were outpacing what they would receive on a preneed contract.  Consequently, funeral homes were limiting consumers to non-guaranteed plans or to single premium insurance contracts.  We first sought to have the Missouri State Board clarify by rule when a preneed seller could charge a fee to price protect a funeral, or to charge a fee when allowing the consumer to pay for a preneed contract by installments.  A draft rule was approved by representatives from the State Board, but the Board lost its quorum before the rule could be approved.   Finally, on April 25th, the State Board approved 20 CSR 2120-3.530, and now Missouri preneed sellers may include such fees without fear of a challenge from the State Board.

Another welcomed change made by the State Board on April 25th was to approve an extension on the filing of annual reports.   Missouri has one of the shortest periods (60 days) for filing a preneed annual report.   Neighboring states not only granted more time (Illinois 75 days, Iowa 105 days and Nebraska 150 days), they also afforded sellers extensions for cause.   Missouri’s sellers were further frustrated by the staff position that annual reports had to be received so as to give the staff sufficient time to review the report prior to the deadline.  But, now, the Board has approved a rule revision that would afford sellers an extension when they need extra time to file the annual report.  That should cut down on the many automatic suspensions that occur each year.

At its April 25th meeting, the Missouri State Board unwound two controversial staff proposals: mandatory consumer disclosures for preneed contracts and the formation of an insurance funded contract.  With 20 CSR 2120-3.205 , the Board staff sought to require Missouri preneed sellers to provide consumers with a two page list of disclosures.  Those disclosures proved confusing because they applied to all forms of preneed contracts, whereas funeral homes typically use a single form of contract funding.  Many funeral homes also use nonguaranteed preneed contracts which also rendered many of the disclosures inapplicable.

With 20 CSR 2120-3.210 , the Board staff also sought to regulate spend down insurance assignments under Chapter 436.  In prior blog posts we have discussed how the State Board can address the staff’s consumer protection concerns with authorities granted under Chapter 333.  However, the Missouri Legislature’s intent with Senate Bill No. 1 was to regulate preneed transactions where consumer funds were handled by funeral homes prior to a death.

With the Board’s April 25th vote, both regulation proposals were rescinded immediately.   In that neither proposal had been formally promulgated, the Board need not promulgate a new rule to terminate either proposal’s enforcement.

Of the two proposals, the one with more far reaching implications is the formation of an insurance funded contract.  Threatened with discipline, many funeral homes began collecting the $25 state fee on each insurance assignment made for spend down purposes.  The Board staff also created a special annual report section for the reporting of these assignments.   The Board will need to give notice to Missouri sellers regarding the annual report and the handling of the $25 state fee.  If the state fee was collected from consumers, funeral homes will need to refund the fee.