On June 11th, Senator Delbert Scott met with a number of death care industry members and regulators to begin mapping out the direction for preneed reform in Missouri.  From that meeting, it was decided that the state’s death care regulators would form review committees that would facilitate a dialog on the issues, and help formulate recommendations for the Missouri Legislature’s Joint Committee on Preneed Funeral Contracts. The Joint Committee is expected to begin hearings in September.  

The State Board of Embalmers and Funeral Directors has formed its Chapter 436 Review Committee, with the first meeting scheduled for July 8th. The Office of Endowed Care will defer formation of its review committee until later in July. The Chapter 214 Review Committee will not meet until August, after the Chapter 436 review committee meetings are concluded. 

To provide some structure for the Chapter 436 meetings, the State Board is circulating a survey on 67 issues. The review committee meetings will have to maintain tight schedules in order to adequately address those issues. The review committee meetings will provide public attendees an opportunity to provide comments. 

It will be crucial that consumers, funeral directors, cemeterians, fiduciaries and vendors contribute to the discussions that will take place at these meetings. 

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.

 

Preneed companies often reach too far in touting the advantages of their company or product. Such is the case with an article in the June edition of the American Funeral Director. Not to be confused with the infamous Lincoln Memorial Life, Lincoln Heritage Life offers advice why insurance funded preneed is often a better choice for funeral directors and consumers. While the author is correct about there being advantages to the insurance funded product, the article makes several gross generalizations and neglects to address the disadvantages of insurance. The timing of the article couldn’t be worse with the evolving NPS/Lincoln Memorial Life scandal. 

Preneed companies should know better than to make such generalizations. State laws regulate the preneed transaction, and so long as this remains true, the wide variance in these laws precludes simple generalizations.   Preneed laws are confusing, and often contradictory.   Preneed companies should resist giving consumers and funeral directors an impression that is otherwise. Funeral directors are not children, so drop the condescending analogies to the Cookie Monster.   Insurance doesn’t mysteriously create two cookies.

Purchaser payments are used by the insurance company to pay commission, administration, contract forms, state insurance department filings, advertising, taxes, actuary salaries, marketing expenses, and reserve requirements. The insurance company overhead results in a low cash surrender value for the older consumer. The older the consumer, the higher the mortality risk. The higher the mortality risk, the more the insurance company has to charge for the insurance policy purchased with installments. The preneed consumer in his/her 70’s may end up paying premiums that exceed the policy death benefit.   

Under given facts, the insurance policy will out perform a trust. For the preneed contract that has a duration of ten or more years, the properly managed trust often outperforms the insurance product. How does the article’s analysis hold up for the trust that averages 6 percent after taxes and expenses? The problem is that many trusts are not managed well, and the investment return may be the low 4 percent the author describes. Small preneed trusts are often ‘parked’ in mutual funds or government securities.     

What about those licensing requirements? Maintaining individual life insurance licenses can be burdensome for funeral directors. With the NPS/Lincoln debacle, the industry will likely see states pass tougher laws on who can sell insurance. After all, the NPS/Lincoln crisis is as much an insurance problem as it is a trust problem. As the article suggests, funeral directors should look closely at the insurance company’s history and financial strength.   Also consider the ‘associates’ that the insurance company retains. For those NPS providers looking for a new insurance program:  

"Fool me once,
shame on you.
Fool me twice,
shame on me."

–Chinese Proverb

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.  

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

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

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

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?