A cemetery client once lamented that he was tired of being the last in line.  He was alluding to the reality that when there is a death, families call the funeral home before the cemetery.   As part of the final arrangements, the funeral home will often sell the family a vault and marker, and deprive the cemetery of crucial burial merchandise sales.   To compound matters for the cemetery, the transaction between the funeral home and the family may start out as an at-need sale for the benefit of the deceased, but the funeral home may also enter into a preneed transaction for the benefit of the surviving spouse.   Consequently, the cemetery has lost current, and future, sales revenues.

Cemeteries tend to overlook one advantage to gaining equal footing when seeking to serve their families: the purchase of cemetery lots is often the first (and only) step many couples take towards funeral and burial planning.   Studies show that many couples purchase their lots, but take no further action towards their funeral and burial plans.   But, those studies are also showing how rising funeral and burial costs are impacting the public’s acceptance of cremation.    So, within a cemetery’s records are the names of families who have shown the desire for a traditional funeral and burial, but without further action, may eventually find that type of service too expensive.    So why aren’t cemeteries (and funeral homes) using those records to identity families to contact about preplanning and preneed?  Those cemetery leads are buried under a mountain of paper.

Lot purchases are typically documented in a deed book, and then in a lot folder indexed to the lots.  If a subsequent merchandise sale is made to the husband and wife, say a marker, the sales contract and marker invoice are filed in the lot folder.  For a cemetery with tens of thousands of lots, the recordkeeping can require enough file cabinets to keep the local Office Depot in the black.  While cemetery accounting software exists, the system is dependent upon those paper records.   So are the industry’s regulators.   The system is similar to that employed by the county recorder of deeds which uses various indices to track real estate records.   Various transactions have to be tied back to a specific lot.  But in contrast to the recorder of deeds, the cemetery may need to track how lot owners are related.  The system cries out for a database, and at least one of the largest cemetery operators has taken a big step in that direction.*  If cemeteries want to be proactive about making their property, merchandise and services more affordable to their families, they need to make their records more accessible.

 

*Contact Kates-Boylston Publications for a copy of their July 30, 2012 Funeral Service Insider

 

 

Who can honestly say they saw this one coming?

 On July 5, 2012, the Missouri State Board of Embalmers and Funeral Directors filed a complaint with the Missouri Administrative Hearing Commission against a Missouri funeral home for alleged violations of Chapter 436, including several transactions that predate Senate Bill No. 1. So, three years after the passage of Senate Bill No. 1, the State Board has initiated its first formal proceeding against a preneed seller.  SB1 armed the State Board with several new tools, including the preneed financial examination.   Pointing to the massive fraud committed by National Prearranged Services, the State’s regulators convinced the Missouri Legislature that such tools were necessary to protect the consumer.  What misconduct did the new financial examination tool uncover that warranted a formal complaint: the funeral home failed to report, and adequately document, insurance assignments and beneficiary designations.

The crux of the State Board‘s argument is stated in Paragraphs 49 and 50 of the Complaint:

49.       A preneed contract is sold when a seller accepts an insurance assignment or is named as owner (prior to August 28, 2009) or beneficiary of a life insurance policy pursuant to an arrangement between the seller and the consumer to ensure payment for the final disposition of the consumer’s dead human body and for funeral or burial services, facilities or merchandise upon the death of the consumer.

 

50.       ******  Funeral sold and entered into preneed contracts with those consumers specified in Exhibit A when ******* Funeral accepted insurance assignment or was named as beneficiary on an insurance policy when the consumer made such assignment or designation with the intent of paying ******* Funeral for the costs of his or her own final disposition.

 

The State Board’s position (with regard to insurance assignments and beneficiary designations made prior to August 28, 2009) is based on the following:

31. Section 436.005, RSMo (2000), set forth definitions for the Old Law and stated, in relevant portion:

 

(5) "Preneed contract", any contract or other arrangement which requires the current payment of money or other property in consideration 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, including, but not limited to, an agreement providing for a membership fee or any other fee having as its purpose the furnishing of burial or funeral services or merchandise at a discount, except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

 

What the State Board is asserting is that Chapter 436 has always defined as a preneed contract any insurance assignment or beneficiary designation made in favor of a funeral home prior to the death of the insured.   That will come as news to most of the industry (99.9% or so), and cause some operators to ask what those six Board Members are smoking.  But for those individuals who regularly attend the meetings of the State Board, this position may not necessarily reflect the views of the State Board members.

The Board’s staff began pressing the State Board more than two years ago to provide clarification on when insurance assignments and beneficiary designations constitute a preneed contract.   At that meeting in Festus, Missouri, the staff also reminded the Board and the industry of the funeral director’s duties under Chapter 208 to make inquiries to the Third Party Liability Unit (of the Department of Social Services) before making refunds to families.   The insurance issue resurfaced last fall (with the conclusion of the initial onsite financial examinations).  Since then, the issue has been bounced back and forth like a ping pong ball between the staff and the Board.   The staff has made various proposals, which the Board has rejected. 

As we have previously suggested, this transaction is one which should be documented by a contract.  Some within the industry assert there is no contract.  I disagree.  The policy owner has made the assignment or beneficiary designation with the expectation that the funeral home will apply the proceeds to their funeral.  The funeral director understands that expectation, and often relies on Chapter 208 for recommending the assignment of insurance.  I agree with the staff in that the ‘professional trust and confidence’ contemplated by Section 333.330.2(14) dictates that this transaction be documented by a contract.  The staff would then argue that any contract made by a funeral home that contemplates future performance must be a preneed contract, and ergo, a Chapter 436 contract.  I disagree. 

Chapter 436 was first enacted in 1965, but was re-written in 1982.  The 1982 law provided the industry the first definition of a “preneed contract”, which was the same as that cited by the Complaint, except that it did not include the following: 

except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

There was sufficient confusion whether insurance policies were covered by Chapter 436 that the preceding phrase was added by legislation that took effect in 1986.  The 1986 legislation was hotly debated, and the product of various compromises, and the result included a horribly ambiguous definition.  A literal interpretation of the new “preneed contract” definition would find that an insurance contract is not a preneed contract ‘unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance’.    But when the seller or provider is named as owner or beneficiary, the contract of insurance is a preneed contract.   That bears repeating: the contract of insurance is a preneed contract.  What the heck does that mean?

The old law was poorly drafted, and ambiguous, in many respects.  There always has been confusion over the extent to which Chapter 436 governed insurance funded preneed.   The old law was written with one preneed transaction in mind: the trust funded guaranteed contract.   Joint accounts were addressed as the first afterthought, and then four years later, insurance was added as another afterthought.   For years the Board staff struggled with whether insurance funded contracts had to be deposited to trust.   And now, 30 years after the old law was enacted, the staff (or is it the State Board) wants to begin enforcing those ambiguous provisions?

What motivations does the staff have for pressing the State Board on the insurance assignment issue?   The need for clarity was the initial explanation given.  The next justification given was the need to protect the consumer.   Both of these have merit, but one can’t help but wonder if Chapter 208 may also provide a third motivation. 

It would be political suicide for any candidate to suggest that Missouri needs to raise taxes.  Instead, state agencies look for other ways to generate revenues, whether that be through fees or charges.  Accordingly, someone in Jefferson City may also be looking at the funeral home’s obligations under Chapter 214.  In conjunction with that 2010 meeting in Festus, the staff has incorporated a MO HealthNet page on the State Board website.   That page is meant as notice to the industry that funeral homes have a duty to make inquiries to Department of Social Services before making refunds back to families.   (You funeral directors can now add tax collector to your job description.)  But that duty only applies to Chapter 436 contracts.

The Complaint seems a heavy handed attempt to force the State Board to define the insurance assignments as Chapter 436 contracts.  While there is need for clarity and consumer protection, neither the old law nor SB1 was intended to regulate the assignment of an existing insurance policy.  SB1 is intended to regulate the sale of contracts where performance is deferred to a future date, and the administration of the consumer’s payments.    The staff must twist SB1 provisions to reach the conclusion that all insurance assignments give rise to a preneed contract.   That approach is not much different from the one NPS used with the old law. 

So, what are those State Board members to do?  Here is a proposal for their consideration.

 

 

For obvious reasons, life insurance is the preneed funding choice for many funeral directors. One hundred percent trusting laws give proactive preneed organizations no choice but to use insurance funding. Insurance provides the commissions needed to finance marketing and a sales force, and, maybe as important, relieves the funeral home from preneed accounting and administration. But insurance funding is predicated on the contract being performed at death. In contrast to funeral homes, cemeteries can (and must) deliver preneed sales in advance of death.

First, and foremost, the grave sale is typically ‘delivered’ as soon as the purchase price is paid. The cash flow generated from the grave sale is too crucial to a cemetery to defer until the purchaser’s death. Few (if any) state laws require the trusting of grave payments, and accordingly, grave sale payments flow directly into a cemetery’s operating account.

Marker and monument sales also generate crucial cash flow to the cemetery. Competition from monument dealers (and funeral homes) prompted cemeteries to offer markers through preneed sales. While it has been customary to defer marker deliveries until death, spiraling granite and bronze costs has forced cemeteries to accelerate deliveries of these sales. Applicable state laws generally require the trusting of preneed cemetery sales, and contemplate trust distributions prior to the consumer’s death.

In contrast to the funeral home, cemeteries do not need insurance for the funding of preneed programs. Cemeteries have an advantage in preneed marketing in that the grave sale has no trusting requirement, and states typically impose lower preneed trusting requirements on the cemetery industry. Where cemeteries feel the insurance void is in the administration required for the preneed sale. Small funeral homes often shun insurance funding in favor of the trust option offered by their state association. There are state cemetery associations that offer a master program, but they are the exception. Consequently, most cemeteries will find preneed to be an uphill climb without the assistance of insurance companies or a master association trust.
 

As alluded to in our prior post, the cemetery’s ability to deliver burial rights and merchandise prior to death complicates the preneed transaction.  In a post, we labeled this the ‘bucket factor’ (Cemetery Preneed Oversight: the bucket factor).  In addition to burial spaces, cemeteries can deliver markers, monuments, vases, urns, outer containers and vaults prior to the purchaser’s death.  While not the norm, cash flow needs and rising granite and bronze costs may dictate that more cemeteries accelerate deliveries of merchandise.  In some situations, services (opening and closing, and inscriptions or engravings) could be the only ‘items’ left to be delivered after death. 

 

Few (if any) state laws require the trusting of grave payments, and accordingly, cemeteries have never viewed these sales as preneed.  Payments made on a grave space went directly into a cemetery’s operating account.  If the purchaser paid for the grave in installments, a deed was issued when the purchase price was paid.  While there may be a risk that the cemetery operator could fail before the deed is issued, there is little out of pocket expense for a successor when completing the transaction.  Otherwise, the cemetery would tend to defer merchandise and services sales to the time of need.  But, competition over burial merchandise sales resulted in a fragmented approach to cemetery preneed.

 

Some cemeteries face competition from monument dealers, while others competed with funeral homes for vault sales.  Cemeteries approached these sales in a piecemeal fashion, using separate contracts, and adding merchandise sales after the grave purchase was completed.  This typically resulted in single item preneed contracts with a funding requirement based on a wholesale cost. 

 

With the emergence of the national death companies came the preneed packaging of cemetery property, merchandise and services, and later, the preneed packaging of funeral and cemetery selections.  Not wanting to leave the future sale of cemetery merchandise to chance, the national companies introduced contract forms that allowed burial rights, merchandise and services to be sold together.  These contact forms also allowed the consumer to write a single monthly check, with that payment being applied to the various items purchased. 

 

The national companies also utilized the common ownership of the funeral home and cemetery to offer ‘packaging’ of funeral arrangements and cemetery arrangements.  As cremation rates increased, this packaging evolved into economy arrangements where a grave space is combined with select merchandise sales and/or funeral services.  The grave sale is often discounted to make the traditional funeral and burial more affordable. 

 

These forms of preneed packaging provide convenience to the consumer and pricing flexibility to the cemetery.  But, the bucket factor requires the cemetery to apply the purchaser payment to the various subcategories of merchandise and service.  With deliveries prior to death, the cemetery cannot to turn to insurance as a source for that accounting.  Consequently, trusts are essentially the only form of preneed funding available to cemeteries. 

 

Preneed fiduciaries will always be dependent upon the death care company for contract data and administration, but that dependence is more acute between the cemetery and the bank.  With the funeral contract, the trustee has but a single funding liability and a single distribution.  As competition heats up, cemeteries will divide and sub-divide the merchandise and services offered to consumers.  Each division represents a bucket if offered on a preneed basis.  As cemetery regulators require greater distribution oversight from the fiduciary, the cemetery will be required to produce some very detailed reports.  This will be a tall task for an industry that remains at-need oriented.   

It is no secret that the larger funeral home operators have more preneed options than the industry’s mom and pops. The large operators have the volume of business that will attract insurance companies and banks, and their program incentives and discounts. Economies of scale provide the larger operator preneed advantages when going ‘toe to toe’ with the smaller operator. A completely different ‘have’ and ‘have not’ environment exists within the cemetery industry. One crucial fact distinguishes cemetery preneed from funeral preneed: a burial space, and certain merchandise and services, can be delivered prior to death. That fact is a problem for both insurance companies and banks, and accordingly, neither industry has courted the cemetery industry in the same manner as they have the funeral industry. And, there are other factors which complicate cemetery preneed. Consequently, cemeteries tend to be more ‘have nots’ than ‘haves’. The lack of preneed not only puts the cemetery at a disadvantage with funeral homes when competing for vault and marker sales, the cemetery also runs the risk of losing out completely to cremation.

Over the next months, this blog will examine the state of cemetery preneed, and its regulation. While the cemetery industry, as a whole, has been slower to embrace the preneed transaction than the funeral industry, some cemeteries have aggressive preneed programs. With such a distinct dichotomy within the cemetery industry, regulators must decide whether to spend resources on the few, or for the mass.
 

Heritage is the term that the death care industry uses to describe the relationship each funeral home or cemetery attempts to forge with the community through years of service. Heritage reflects a commitment to the community, and through that commitment, the operator can expect the community’s business.

Initially, the vast majority of funeral directors fought preneed because the upstart operator used pricing strategies to undermine the heritage of the established competitor. Accordingly, the early preneed laws were intended to choke off preneed. But now, the vast majority of funeral homes offer some form of preneed, and preneed laws are slowly changing to reflect that.

Funeral directors also perceive the business practices of the national companies as a threat to their heritage. The larger the funeral operator, the more access it has to economies of scale, investment capital, and resources for advertising and administration. For sixty years, Pennsylvania funeral homes have been subject to a law that was intended to give the ‘little guy’ a level playing field. As reported by the Philly.com, a Federal court has found many provisions of the Pennsylvania Funeral Directors Law unconstitutional.

The Pennsylvania Funeral Directors Association expressed “surprise” over the decision, and encouraged the State Board of Funeral Directors to appeal the decision. The Association is being somewhat disingenuous with its membership, the public and the State Board. The ruling’s issues had been the subject of years of litigation, and the Court’s frustration with the State Board to heed warnings to change the law bubble out in a footnote on page 154 of the ruling. While the State Board takes the brunt of the Court’s rebuke, we anticipate the Association’s influence has played a pivotal role in the Board’s response to the litigation.
 

The Internet has provided consumer advocates a valuable platform for educating the public with ‘how to’ death care information. But, for the most part, that ‘how to’ information has been confined to the funeral half of the equation. A recent Mother Earth News article provided a detailed description of the issues faced by the author when attempting to arrange a private burial. The issue resurfaced for this author twice during the past few weeks. The most recent situation involved a funeral director attempting to accommodate a family that sought to bury a family member on their own land.

While there may be various state laws that impact the private burial, the most restrictive laws tend to be local in nature. The Mother Earth News article suggests that a private burial will be easier to accommodate in a rural area than a town or city. The realities are that private burials within any municipality will be difficult, if not impossible. City ordinances or codes often prohibit the burial of dead without a special use permit. Obtaining one often requires zoning approvals, which can be very expensive. The smallest cemetery for which I obtained such approval was for a prominent community leader and his wife. The fact this client owned the community’s beloved sports franchise no doubt helped in the zoning commission’s decision to grant the requisite permit.

Websites such as eHow provide an overly simplified explanation for starting a family cemetery. As websites from England suggest, a family must consider the impact of a private burial on the future use and transfer of their property. When future family members have more pressing needs for that property, a private burial may not be the final resting ground that was intended. Such was the fate for my smallest cemetery client.
 

For some Missouri funeral homes, the ‘disagreement’ over the Section 436.405.1.(8) and insurance assignments has been brought to their doorstep.  In January, the State Board and their staff debated the issue of whether insurance assignments and beneficiary designations made in favor of a funeral home should constitute a preneed contract. The State Board rejected the staff’s interpretation of the fore mentioned section, and now the auditors seem to be pressing that disagreement to the Missouri’s funeral homes by way of the Chapter 436 financial examination.

This blog went on record in opposition to the staff’s regulation proposal as too broad, but there is also a need to go on record for the need for better consumer protection in these transactions.

When an assignment of insurance (or the designation of beneficiary) is made, it is done so in anticipation that the funeral home will apply the death benefits to the insured’s funeral arrangement. But have there been any promises about the prices or the right of the insured’s family to use another funeral home?  Such issues should be set out in an agreement between the funeral home and the insured so that the insured’s family is not left to guess. 

 

In relation to many of its peers, Springfield’s Oak Ridge Cemetery could be labeled progressive. Oak Ridge maintains both an endowed care trust and a preneed trust. In contrast, a substantial number of the country’s cemeteries have neither. The fact that Oak Ridge Cemetery is owned and operated by the City of Springfield, Illinois, makes the cemetery even more remarkable. Few municipal cemeteries have such funds, and instead, must be subsidized by taxpayers for operating funds. Despite the foresight of Oak Ridge’s board of directors, the cemetery has had to resort to “netting” the past few years to make ends meet. They have done so to the tune of almost a million dollars, and Springfield’s Mayor is being advised that drastic action is necessary.

The Mayor’s attorney blames Oak Ridge’s board of directors for bad investments and netting deposits, and recommends that the control of the cemetery be changed. With the increase in cremations (and the decline in burials), the Oak Ridge board failed to adapt, and instead, spent the funds that should have been contributed to the trusts. To make up for the decline in trust contributions, the board took more risks with trust investments, which exposed the trusts to the market declines of 2008. The combination of netting consumer payments and investment declines put Oak Ridge in a deep hole. And now, the Mayor’s attorney thinks it’s time for a change in management, and for the cemetery to start living within its means. Sounds like sage advice, but it’s not very practical.

Turning Oak Ridge over to the city’s park and recreational department will only ensure a decline in the cemetery’s operations. While the cemetery’s board may be guilty of staying with their old business plan too long, those individuals are more familiar with the operation of a cemetery than those city employees who oversee Springfield’s parks.

Regarding ‘bad’ investments, the Mayor’s attorney suggests the cemetery board should have stayed conservative. The problem with that advice is that the 2008 market crash hit mortgage-backed securities the hardest, which happens to be the ‘bread and butter’ of most cemetery trust funds. The fact is that most cemetery trusts may be too heavily invested in fixed income, and the need is to diversify their investments (as opposed to ‘going conservative’). (In that the Mayor’s attorney is the same individual who defended the IFDA master trust’s investment in key man insurance, this criticism rings a little hollow.)

While Springfield needs to make the Oak Ridge board more accountable, those members should be given the opportunity to develop a new business plan for the cemetery. The decline in traditional burials is inevitable, and cemeteries must plan accordingly. While the costs of the traditional funeral and burial are a leading factor to the rise in cremations, cemeteries need to evaluate the prices charged for their interment rights and services. They also need to evaluate the need for marketing. One such opportunity is to market to the consumer who has already chosen cremation. Another opportunity is to form marketing alliances with funeral homes.

Or, the Mayor could pull in the reigns and allow the taxpayer to foot the bill.
 

Mortuary Management recently ran a short editorial criticizing cemeteries, stating “we can only conclude that cemeteries will, in the long run, be the losers”, and “it may be time for a reevaluation of standards and staunch principles of the past”. The editorial is nothing more than a handful of comments from anonymous funeral directors about interment charges, and a vague criticism of cemeteries. However, the quotes are representative of the friction that frequently exists between the funeral home and the cemetery that maintain an adversarial relationship while seeking to serve the same families. All too often, families get caught in the middle of that competition, and in the long run, everyone loses.

The funeral home often has the initial contact with the family, and it is natural that the funeral director will attempt to provide as much of the final arrangement as possible. The family often leaves the funeral home believing that everything has been taken care of. But as the quotes from the editorial indicate, the cemetery will charge the family for opening and closing the burial space. There may also be cemetery charges for weekend interments, the rental of a tent, vault installation charges, second interment rights and memorial installation charges.

The editorial seems to suggest that cemeteries are solely to blame when families are surprised by such charges. In that cemeteries are not subject to the General Price List disclosure requirements of the FTC’s Funeral Rule, funeral directors may not have access to information about what the cemetery charges. The same may be true for monument dealers who need to know about marker restrictions, setting fees and care charges. Unfortunately, some cemeteries view lot owners as their customers, and do attempt to keep the funeral director and monument dealer “in the dark”. If the intent of the editorial was to call out this practice, then the criticism is appropriate.

However, many cemeteries do publish their services, restrictions and fee requirements. The funeral director has no duty to ensure that the family understands all of the cemetery’s services and charges, but he/she does a disservice to the family when omitting that information from the arrangement meeting, and then subsequently assigning blame to the cemetery.

As the editorial suggests, the funeral home and the cemetery are going to experience a decline in their traditional services. It is time for both to reevaluate the “standards and staunch principles” established by their competition. The funeral home and cemetery under common ownership has an economic advantage over its independent competitors. The ‘combo’ operator can package funeral and burial selections to provide the consumer a more competitive price, and better ensure the consumer understands the cemetery requirements.