04/15/2009

UPDATE: Preneed Compliance Manual for Ohio's New Preneed Statute

By: T. Scott Gilligan, OFDA General Counsel

OFDA was successful in its efforts to overhaul Ohio's preneed law with the passage of SB 196 in December, 2008.  That Bill, which was signed by governor Strickland on January 6, 2009, will technically go effective on April 6, 2009.  However, because the law provides a 90 day transitional period for bringing contract forms and preneed practices into compliance, the real effective date of the new preneed law is July 5, 2009. 

OFDA members should use the first part of this Compliance Manual well in advance of July 5, 2009 to ensure that their preneed contract forms have been modified to comply with the new statute.

BECAUSE OF THE NEW CONTRACT DISCLOSURES AND MANDATORY NOTICES REQUIRED BY THE LAW, A FUNERAL HOME THAT DOES NOT REVISE ITS PRENEED CONTRACTS BEFORE JULY 5, 2009 WILL BE IN VIOLATION OF THE LAW THE FIRST TIME IT ENTERS INTO A PRENEED CONTRACT AFTER THAT DATE.  DON'T WAIT, DO IT NOW.

The second portion of this Preneed Compliance Manual discusses the other modifications that the new preneed law institutes and which funeral homes will have to incorporate into their practices by July 5, 2009.  Please review these carefully.  Also, if you are funding preneed contacts with a trustee other than OFDA Master Trust or if you are using insurance to fund preneed contracts, contact your trustee and preneed insurance company to confirm that they understand their new obligations under the preneed law.

For those funeral homes using insurance agents to sell preneed insurance policies, please review Section III which explains what insurance agents, who do not have a funeral director's license, may and may not do in selling preneed funeral insurance.

I. PRENEED CONTRACT DISCLOSURES AND MANDATORY NOTICES

A major goal of the new Ohio preneed law is to ensure that preneed consumers, whether funding a preneed contract by insurance or trust, have a full written explanation of all meaningful aspects of the preneed transaction.  The Ohio Board has reported that many of the preneed problems that consumers encounter result not from fraud or deception, but simply because the consumer did not understand the mechanics of the preneed transaction.  While detailed disclosures and mandatory notices will not solve all of these problems, it will help to reduce consumer confusion.  Moreover, it will serve to blunt charges that funeral homes are not being transparent in their dealings with preneed consumers. 

In the sections below, OFDA provides a comprehensive checklist of the contract disclosures that must be made.  There are three important points for funeral homes to understand before using this checklist.  First, Section A of the checklist applies to all preneed contracts, while Sections B and C apply only to trust-funded contracts or to insurance-funded contracts respectively. 

Secondly, the preneed law only requires that the contract disclosures be made; the law does not provide required language that a funeral home must use to make the disclosures.  On the other hand, when we discuss the mandatory notices, the funeral home must use the specific language provided for in the preneed statute.  Moreover, the mandatory notices must be printed in boldface print on the preneed contract.  On the checklist, we provide the required language which must appear on your preneed contracts.

The third important point about the contract disclosures and mandatory notices is that your preneed contracts probably already contain much of this information.  However, some of the requirements, especially with regard to the mandatory notices, are brand new.  Therefore, it is important for each funeral home to use the checklist to modify their preneed contracts prior to July 5, 2009.

A.  Required Disclosures and Mandatory Notices For All Preneed Contracts. 

All preneed contracts, whether trust-funded or insurance-funded, must contain the following contract disclosures and mandatory notices by July 5, 2009.  Please use this checklist to ensure that your revised preneed contract forms meet the requirements of the new statute.

Review your preneed contract and check the box after you confirm that each of the following contract disclosures and mandatory notices are printed on your preneed contract forms:

• Seller's name, address and phone number.
• Purchaser's name, address and phone number.
• If the preneed contract names a beneficiary other than the purchaser, the beneficiary's name, address and phone number.
• A list of the funeral goods and services purchased or, in the alternative, the Statement of Funeral Goods and Services Selected attached to the preneed contract.
• A statement disclosing whether the preneed contract is a guaranteed or non-guaranteed priced contract and, if it is guaranteed only in part, which funeral goods and services are covered by the guarantee.
• If the preneed contract is a guaranteed contract, the funeral home shall disclose that in exchange for all the proceeds of the trust, insurance policy or annuity, the funeral home shall provide the funeral goods and services set forth in the preneed contract without regard to the actual costs of such funeral goods and services prevailing at the time of performance. The contract must also disclose that the funeral home may receive any excess funds remaining after all expenses for the funeral have been paid.
• If the preneed funeral contract is a non-guaranteed contract, the contract shall disclose that the proceeds of the trust, insurance policy or annuity shall be applied to the retail prices in effect at the time of death for the funeral goods and services and that any excess funds remaining after all expenses for the funeral have been paid shall be paid to the estate of the decedent or the beneficiary named in the insurance policy or annuity. Additionally, in the event there are insufficient funds to cover the cost of the funeral, the funeral home shall not be required to perform until satisfactory payment arrangements have been made.
• A disclosure that the purchaser has the right to make the contract irrevocable and that if the preneed contract is irrevocable, the purchaser does not have the right to revoke the contract.
• The following mandatory notice which must appear on the contract in boldface print:

"NOTICE: Under Ohio law, you, as the purchaser of this contract, may rescind it and receive a refund of all payments you have made under the contract.  To rescind the contract, you must notify the seller within seven days of signing the contract."

• The contract must disclose that the seller may substitute funeral goods or funeral services of equal quality, value and workmanship if those specified in the preneed contract are unavailable at the time of need.
• The preneed contract must disclose that any purchaser of funeral goods and services is entitled to receive price information prior to making the purchase in accordance with the FTC Funeral Rule.
• The contract must contain the following mandatory notice in boldface print:

"NOTICE: Under Ohio law, the person holding the right of disposition of the remains of the individual contract beneficiary pursuant to section 2108.70 or 2108.81 of the Revised Code will have the right to make funeral arrangements inconsistent with the arrangements set forth in this contract.  However, the individual contract beneficiary is encouraged to state his or her preferences as to funeral arrangements in a declaration of the right of disposition pursuant to section 2108.72 of the Revised Code, including that the arrangements set forth in this contract shall be followed."

B. Required Disclosures and Mandatory Notices in Trust-Funded Preneed Contracts.

In addition to the contract disclosures and mandatory notices set forth in Section A above, those preneed contracts that are funded by a trust must also contain the following five disclosures and/or mandatory notices:

• The preneed contract must list the social security number of the purchaser and, if there is a beneficiary, the contract shall also list the beneficiary's social security number.
• The preneed contract must disclose the name and address of the trustee and indicate whether trustee fees, expenses and/or taxes will be deducted from the trust. The disclosure must also state who will be responsible for the taxes owed on the trust earnings
• The preneed contract must explain the form in which the purchase price shall be paid and, if the price is to be paid in installments, a disclosure to the purchaser regarding what constitutes a default under the contract and the consequences of the default.
• The following notice must appear in boldface print on the preneed contract:

"NOTICE: You, as the purchaser of this contract, will be notified in writing when the trustee of this contract has received a deposit of the funds you paid the seller under this contract.  If you do not receive that notice within sixty days after the date you paid the funds to the seller, you should contact the trustee identified in the contract."

• If the preneed contract is irrevocable and stipulates a guaranteed price for the funeral goods and services to be provided under the contract, the contract must disclose to the consumer that a transfer fee may be charged by the seller if the purchaser wishes to transfer the contract to another seller.

C. Contract Disclosures and Mandatory Notices For Insurance-Funded Contracts.

In addition to the contract disclosures and mandatory notices set forth in Section A above, a preneed contract that is funded by the purchase of the assignment of an insurance policy or annuity must contain the following  four contract disclosures and mandatory notices:

• The contract must disclose the name and address of each applicable insurance company and the right the purchaser has regarding canceling or transferring the applicable policy or annuities.
• If funding for the insurance policy or annuity is to be paid in installments, the contract shall disclose the terms of payment for the remaining installments.
• The contract must disclose the list of actions that constitute default under the preneed funeral contract and the consequences of the default.
• The following notice must appear in boldface print on the preneed contract:

"NOTICE: You, as the purchaser of this contract, will be notified in writing by the insurance company identified in this contract when the insurance policy or policies, or annuity or annuities, that will fund this contract have been issued.  If you do not receive the notice within sixty days after the date you paid the funds to the seller, you should contact the insurance company identified in the contract."

If the disclosures required in subsections 2 and 3 above are already contained in the insurance policy or annuity, than the preneed contract does not have to repeat those disclosures.

D. Preneed Contracts for Insurance Assignments.

OFDA members should be aware that the new preneed contract disclosure requirements apply not only when a consumer arranges a preneed funeral through the purchase of a new insurance policy, but also if they arrange a preneed purchase through the assignment of existing insurance policies.  The same types of disclosures that need to be made when a consumer purchases an insurance policy must also be made when the consumer chooses to assign existing insurance policies to the funeral home in payment of funeral goods and services to be delivered at a later date.

While it is expected that preneed insurance companies will be providing preneed contract forms to their funeral home customers prior to the July 5, 2009 effective date, it is doubtful that any insurance company will be providing preneed contract forms for preneed arrangements that are funded by insurance policy assignments.  Therefore, OFDA has placed on its website a preneed contract form for those situations when a consumer assigns insurance policies to the funeral home.  The name of the form is "Irrevocable and Non-Guaranteed-Price Preneed Funeral Contract Funded by the Assignment of Insurance."  OFDA members should feel free to download the form and use it whenever a consumer seeks to fund a preneed contract by the assignment of existing insurance policies.

II. NEW REQUIREMENTS AND RESTRICTIONS

There are several new requirements and restrictions in the preneed law that OFDA members must incorporate into their preneed practices by July 5, 2009.  In this Section II, we summarize each of the new items:

A. No Conversion of Trust Funds Into Insurance Policies.

Once funds received from a consumer have been deposited into a preneed trust fund for an irrevocable preneed contract, those funds may not be withdrawn by the seller to purchase an insurance policy or annuity.  This prohibition does not restrict a trustee from using trust monies to purchase life insurance policies or an annuity as an investment for the trust fund.  However, the trustee would not be permitted to pull the funds out of trust in order to purchase an insurance policy or annuity.  

B.  Assignment of Insurance Rights. 

If a purchaser of a preneed funeral contract that is irrevocable and funded by an insurance policy or annuity notifies the funeral home that the purchaser is transferring the preneed contract to another funeral home, the original funeral home must assign its rights to the proceeds of the insurance policy to the successor funeral home.  That assignment of rights must be made within fifteen (15) days after the original funeral home receives a written notice from the purchaser that designates the successor funeral home. 

C. Cancellation Fee.

If the purchaser of a revocable preneed contract sends a written notice of cancellation to the funeral home and the trustee, the trustee is to process the cancellation.  If the preneed contract stipulates a guaranteed price for the funeral goods and funeral services to be provided under the contract, the original funeral home may collect a cancellation fee of up to ten percent of the value of the assets of the trust on the date of the cancellation.  If the funeral home intends to take advantage of this cancellation option, it must provide disclosures in the preneed contract stipulating what the cancellation fee will be for a guaranteed price contract.  The cancellation fee may not exceed ten percent of the trust amount as of the date of cancellation.  

D. Right of Portability.

Under the existing preneed law, there is no provision which requires a funeral home to transfer an irrevocable funeral contract and the funding related to the contract to another funeral home upon the request of the purchaser.  The new preneed law changes this and provides consumers with a right of portability.  If the purchaser of an irrevocable preneed contract notifies the original funeral home that it is transferring the preneed contract to another funeral home, the trustee is to make the transfer of funding within fifteen (15) days of receiving that written notice.  The original funeral home is required to relinquish and transfer all rights under the preneed contract to the successor funeral home.  The trustee must confirm the transfer by providing written notice of the transfer to the original funeral home, the successor funeral home, and the purchaser.

E. Transfer Fee.

If an irrevocable contract is to be transferred to a new funeral home and if it stipulates a guaranteed price for the funeral goods and funeral services to be provided under the contract, the original funeral home may collect from the trustee a transfer fee of up to ten percent of the value of the assets of the trust on the date the trust is transferred.  If funeral homes are to collect a transfer fee, they must disclose the amount of the transfer fee in the preneed contract.  The transfer fee may not exceed ten percent of the value of the assets on the date of the transfer.
 
F. Transferring Trust Funds to a New Trustee.

Under the preneed statute, the funeral home retains the right to switch trustees and transfer trust funds to a new trustee.  If a seller decides to select a new trustee, the original trustee must notify the purchaser of the transfer in writing thirty (30) days after the transfer occurs.  That notice shall provide the purchaser with the name and contact information for the new trustee.  Upon receipt of the trust funds, the new trustee shall also notify the purchaser of the receipt of the trust funds.

G. Surrender of Trust Funds. 

Whenever a funeral home holding a preneed contract receives notice that the contract beneficiary has died and that another funeral home has provided the funeral goods and services, the original funeral home must direct the trustee to distribute the trust funds to the contract beneficiary.  The original funeral home is required to issue instructions to the trustee within thirty (30) days after receiving notice that the beneficiary has died and another funeral home has provided funeral services.  If the preneed contract stipulated a guaranteed price for the funeral goods and services that were to be provided, the original funeral home may collect a cancellation fee of up to ten percent of the value of the assets of the trust on the date the trust is disbursed.

H. No Constructive Delivery.

Under the preneed statute, a seller does not have to place preneed funds into trust for funeral goods if those funeral goods are delivered to the contract beneficiary.  Under the existing statute, a seller could take advantage of this provision by simply storing the preneed goods on the funeral home premises.  That option is no longer available under the new preneed statute.  The only way to avoid trusting would be to make actual delivery of the preneed funeral goods to the contract beneficiary.

III. INSURANCE AGENTS AND PRENEED SALES

The new preneed law does not change any of the current restrictions and requirements regarding insurance agents selling life insurance to fund preneed contracts.  However, the law does codify and clarify an earlier Attorney General's Opinion on what insurance agents may and may not do in selling preneed insurance.  Therefore, the funeral homes that use insurance agents should have a better understanding of how the agents may communicate with preneed consumers in the sale of preneed insurance.

Funeral homes using preneed insurance agents should review the activities of the agents and confirm that those activities meet the following requirements of the statute:

• If a preneed funeral contract includes the sale of funeral services, it may be sold only by a licensed funeral director.   While an insurance agent who does not have a funeral director's license may sell preneed insurance to fund a preneed funeral service contract, only a licensed funeral director may sell a preneed funeral contract that contains funeral services.
• When a preneed insurance agent meets a consumer for the purpose of selling an insurance policy or annuity that will be used to fund a preneed contract, the insurance agent may not offer any advice or make recommendations to the consumer about funeral services.  This includes a prohibition on any discussion regarding the advantages or disadvantage of any type of funeral service.
• Although an insurance agent is prohibited from making recommendations regarding funeral services, the insurance agent may provide the consumer with price lists from one or more funeral homes and other materials to assist that person in determining the cost of a desired funeral.  The insurance agent may discuss the cost of the funeral goods and services with the consumer in order to assist the person in selecting the appropriate amount of life insurance to cover the cost of a desired funeral.  The insurance agent may also complete a worksheet or other document to calculate the estimated cost of the funeral in order to sell the appropriate policy. 
• While an insurance agent may complete a worksheet which lists funeral goods and services desired by the preneed consumer, only a licensed funeral director may arrange the sale of preneed funeral services.  If a preneed funeral service contract includes funeral services, the contract must be filled out by a licensed funeral director.  In addition, it may only be executed by a licensed funeral director.  Insurance agents that are not licensed funeral directors should not fill out nor execute preneed funeral service contracts. 

IV. CONCLUSION

OFDA members with questions regarding the new preneed statute should contact Scott Gilligan at 513-871-6332 with any questions.