Preneed: A Pandora's Box of Problems
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.
David L. Bingham, Jr. (Junior) is getting his 15 minutes of fame.
The Associated Press ran Junior’s story about the wrong David L. Bingham, Sr. having been buried next to his mother. The cemetery has offered Junior some options for correcting the misburial, but he has rejected them all. A demand for compensation is in the winds.
A more detailed story about the situation was reported by the The Enquirer, and it would seem that Junior may be exploiting the situation.
Misburials are rare, but they happen. In this situation, the stated facts suggest that someone contacted the cemetery for a burial of a David L. Bingham, Sr. and a records check indicated David L. Bingham Sr. already owned a lot. How many David L. Bingham Sr.s can there be? The cemetery staff would have made some type of inquiry, and the individual arranging the burial must have made an assumption, and the late Mr. Bingham became acquainted with the late Mrs. Bingham, so to speak.
Junior knows there was a mistake because Dad is buried in Kentucky. Sounds like Junior’s parents were divorced. Which raises the question: Was the space in dispute purchased for Junior or for Dad?
The cemetery may be asking the same question, but it sounds as though a change in management and ownership has occurred since the Binghams purchased their lots. The new owners may not be able to confirm this fact.
Generally, cemeteries retain the authority to correct misburials through their rules and regulations . State laws typically recognize this authority in statutes. Ohio law regarding disinterments provides an exception to allow burial corrections. But Junior will have no part of this, claiming that "I don’t want to be buried in a used grave!" Junior is even suffering from anxiety attacks. Sounds like Junior is being coached by an attorney. (Don’t you just love lawyers.)
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:
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.
While Missouri has had a right of sepulcher law for five years, there has been disagreement whether the law allowed an individual to override the preferences of his/her next-of-kin. The ambiguities of the original law left funeral directors in a quandary about following the instructions of designated agents. This led to confusion for many Missourians who thought they had a right to control their disposition.
Credit should be given the Missouri Funeral Directors and Embalmers Association for pressing legislation that will clarify Missouri residents can use a durable power of attorney to ensure their funeral or cremation preferences are carried out through a designated agent. HB 1871 has been recommended for passage, and its fate for becoming law will be decided in the next few weeks.
A few months ago I stumbled across the FuneralAdvice.com website when searching the net for some information on embalming. Google found a post on the site that was somewhat helpful, but did not provide the answer I was looking for. I bookmarked the site, and by coincidence, visited the site again today.
The site’s current post asks what can be done when Grandma’s preneed contract is refused by the new owners of the local funeral home? The site acknowledges this situation is becoming more common, and recommends that the poster contact the state board of funeral directors for suggestions. The response concludes with the following advice:
A good lawyer should be able to quickly and effectively remedy the situation.
If this post is genuine and the site sponsors have extensive experience with the death care industry (as they claim), then I must not be a good lawyer. I have resolved many disputes such as this with a letter threatening litigation. In almost all situations, the new “owners” eventually agreed to honor the contract. However, I do not consider this type of remedy to be either quick or effective for the family. The value of the ritual has been permanently scarred by the experience.
The About page for FuneralAdvice.com explains the site was born out of the need to find non-biased information relating to the funeral industry. The page also advises that the company that manages the website has extensive experience in the funeral industry through the ownership of other websites related to the industry. If one takes the time to track through the provided hyperlinks to the related websites, additional information can be found about the company’s officers. When I read through their bios, I can’t help but think of that line from the hotel commercial:
No, I am not a funeral director, but I did sleep at a Holiday Inn Express last night.
There is a need for Internet websites that provide objective information relating to the funeral industry. While FuneralAdvice.com does provide some useful information, the site goes too far in holding itself out as “Funeral Advice You Can Trust”. The format also seems to be misleading, and I sense that FuneralAdvice.com is just seeking to establish traffic for the web services offered to the funeral industry.
Certainty? In this world nothing is certain but death and taxes.
Benjamin Franklin
The “collapse” of National Prearrangement Services comes as a shock to both the company’s clients and competitors. For the seventeen states in which NPS transacted business, regulators are scrambling to get their arms around the magnitude of the problem. NPS’ adversarial reputation will cause many regulators to move cautiously. However the capitulation by NPS to the termination of its marketing operations should cause regulators to consider whether the individuals that control NPS and its related sibling corporations have employed a rearguard strategy.
Missouri and Texas will figure prominently in regulators’ efforts to protect consumers. NPS maintains its corporate headquarters in St. Louis, Missouri. The insurance company to which NPS funnels its preneed sales, Lincoln Memorial Life, is a Texas company located in Austin. Accordingly, records of NPS’ preneed sales should be in St. Louis and the funds received by NPS should (hopefully) have made their way to Austin, and subject to the jurisdiction of the Texas Department of Insurance (TDI).
However, the news from TDI has been a bit confusing. On April 9th, TDI issued a press release that disclosed that an Agreed Order had been entered into with NPS. The press release states:
The TDI-issued Hazardous Financial Condition Order requires the companies to establish a plan to pay policyholder claims and to address existing contracts.
"While every effort was made to secure the companies and return them to normal operations, the decision was made to take this regulatory action," said Texas Insurance Commissioner Mike Geeslin. "As we move forward, our goal is to use every law on the books to protect consumers, coordinate with other regulators and states and – most importantly – keep all parties informed as issues develop."
"It is imperative that we work closely with NPS and the funeral providers to ensure all Texas consumers receive their prepaid funeral goods and services as originally promised," said Texas Banking Commissioner Randall James.
For years, these companies have been dependent upon new sales (and trust transfers) for revenues to meet promises made to funeral homes. Consequently, TDI’s assurances about returning these companies to ‘normal operations’ rang hollow when news of NPS’ termination of its sales personnel was leaked. A day later, the Kansas City Star reported that a Kansas lawyer had taken “control of the company Tuesday as action manager of behalf of Texas,…” So, what is going on?
The lawyer referenced by the Kansas City Star article has experience with insolvent insurance companies, and so one explanation could be that Texas is preparing to take control of Lincoln Memorial Life.
With NPS being deprived future sales, the Lincoln Memorial assets may be the only source of payment for hundreds of thousands of consumers. Texas reported 39,000 policyholders, and Missouri reported 46,000, and while these two states may account for a substantial portion of NPS’ business, there are 15 other states with NPS sales.
With information in such short supply, one must be careful not to read too much into these press releases. But each seems to place emphasis on “Policies” and “Policyholders”. There seems to be an assumption (or at least a hope) that each NPS sale ended in a Lincoln Memorial policy. Yet, many of us know that NPS aggressively pursued trust rollovers that included questionable records for the preneed contracts involved. With regard to those transactions, it is unlikely that purchasers were ever contacted. The question then becomes what NPS/Lincoln did with the funds from their trust rollovers?
To know just how deep the NPS waters are, Missouri is key to obtaining NPS and its corporate records. On April 9th, the Division of Professional Registration issued a press release that advised:
Funeral directors are cautioned to ensure they maintain adequate records and evaluate any preneed arrangement sold on behalf of their funeral establishment.
On April 11th, The Kansas City Star reported the following comments:
“We want people to know we are working to safeguard their interest,” ……….. “We’ve stopped the flow of business to look at what’s going on. Our concern is that they get what they paid for.”
While terminating NPS’ authority to enter new transactions had to be its first priority, Missouri must now determine how it can best protect all consumers, not just those from Missouri. If there is any doubt about the trust rollover transactions, Missouri needs to take prompt action to secure NPS’ corporate records.
Which brings this post back to its introductory muse: has NPS been sacrificed as some sort of rearguard maneuver?
We can hope that NPS will take all actions necessary to provide assurances to its policyholders, including cooperation with Missouri’s regulators. But if push comes to shove over records that document the company’s money trails, NPS may resort to its true colors when responding to Missouri’s requests. Funeral directors must prepare for that potential conflict.
All funeral homes that have NPS contracts should begin an inventory of their paperwork. For funeral directors that participated in an NPS trust rollover, the inventory should include documentation regarding the application of the trust funds. If their records do not include such documentation, funeral directors need to consider making an immediate written request to NPS. An even tougher (but necessary) decision may be whether to copy that request to your state preneed regulator.
A bank client recently asked that I provide some standard of accountability for administration provided to a master preneed trust. As I struggle to provide the client a concise answer, I can’t help but to think that the issue will also become a crucial concern to consumers and funeral directors alike. As news reports reach consumers about the regulatory actions taken against the preneed programs maintained by NPS and by the Illinois Funeral Directors Association, families will begin to contact their funeral directors for reassurances about their preneed payments. Unfortunately, many state associations have not made accountability a priority, and their members may be ill prepared to respond to consumers’ concerns.
For the independent funeral home, the state association can be a valuable resource to understanding the requirements imposed upon the profession by federal and state laws. As the preneed transaction grew in acceptance, most state associations formed master trusts to serve their member funeral homes. These master trusts came to reflect not only the respective state’s preneed law, but also the attitudes and values of the association leadership.
Consumers need to appreciate that master preneed trusts are an important source of income to the sponsoring association. Because there are costs to providing contracts, administration, compliance, and asset management, the master trust provides the smaller funeral home the economies of scale necessary to reducing costs that would otherwise be prohibitive. However, the Illinois situation suggests that former association leadership may have exploited both members and consumers. While the association’s website is finally acknowledging the issue, the response lacks in terms of accountability.
Getting back to my client’s question, how should accountability be measured for preneed administration from state to state? The diversity in the approaches taken by the state legislatures in regulating the preneed transaction is the single greatest hurdle to a comprehensive, national evaluation of preneed accountability. But perhaps transparency in terms of disclosures to both members and consumers would be one measure of accountability. On this standard, I would give kudos to the New Jersey Funeral Directors Association. It may be a sad reflection on the industry, but many funeral directors do not know what they are being charged for preneed services. The NJFDA provides this information for all to see.
If consumers do call for reassurances, funeral directors should have some basic information available to provide:
When funeral directors begin to call for reassurances, association leadership should be prepared to provide the following information: