09/08/2008

NPS Funding Issues Near Resolution

By T. Scott Gilligan, OFDA General Counsel

Is your funeral home holding one or more of the 200,000 preneed contracts "funded" by an insurance policy sold through National Prearranged Services, Inc. ("NPS"). Although NPS has sold contracts in over 40 states, its primary market is centered in the Midwest and Texas. Unfortunately, Ohio falls into that market area and many OFDA members are concerned about funding for preneed contracts written through NPS.

According to the latest figures compiled by the Ohio Department of Insurance, there are approximately 3,800 NPS funded preneed contracts outstanding in Ohio. The aggregate face amount of the policies is over $19,250,000 or a little over $5,000 per contract.

What Happened?
If it sounds too good to be true, it usually is. This adage is aptly applied to NPS and its preneed funding schemes. Funeral homes using NPS were "guaranteed" that the funding would keep pace with their at-need prices. Peddled by attractive sales persons, enticed by competitive commission rates, protected by growth guaranteed to keep up with at-need prices - - how could NPS do it? It sounded too good to be true.

It was. And in the past year, it all came tumbling down. Investigations by state funeral boards, insurance departments, and attorney general offices in Texas, Missouri, and other states, including the Ohio Department of Insurance, disclosed that NPS had undertaken a series of questionable and allegedly illegal steps to keep its preneed funding scheme afloat. NPS, together with Lincoln Memorial Life Insurance Company and Memorial Service Life Insurance Company, NPS' two Texas-based affiliated insurance companies, allegedly undertook the following actions with an indeterminate number of preneed contracts to keep cash-flowing its operations:

* NPS, which was the owner of the whole-life insurance policies issued to fund the preneed contracts, surrendered the policies for cash and purchased term life policies. NPS then defaulted on premium payments for many of the term life policies.
* NPS borrowed against the whole-life policies to generate cash.
* NPS accepted funds from funeral homes for preneed contracts and did not purchase policies so that many preneed contracts went completely unfunded.

When these practices finally came to light, one state after another prohibited further sales by NPS. On May 14, 2008, the State of Texas put Lincoln, Memorial and NPS into receivership. The Texas Department of Insurance took over the operation of those three entities and was charged by a Texas court to develop a plan of operation for the future.
At a hearing before the court in July, 2008, the Receiver reported on the dismal financial conditions of NPS, Lincoln and Memorial. Lincoln and Memorial had a combined negative equity of approximately $170 million. That means that if all of the 200,000 preneed contract holders were to die, the two companies would be approximately $170 million short on paying the face amount of the insurance policies used to fund those preneed contracts.

NPS, on the other hand, was in far worse financial straits. Remember that NPS is the entity that guaranteed the payoff on the preneed contract would equal the funeral home's at-need prices when the death occurred. The Receiver calculated NPS' ability to meet its growth guarantying obligations would fall short by a staggering $950 million.

The Fallout.
Fortunately, for funeral homes holding NPS contracts, the news is not all bad. Each state has an insurance guaranty association that stands behind insurance companies that are licensed to write insurance in that state. In the case of NPS, the National Organization of Life and Health Insurance Guaranty Associations negotiated a proposed plan of liquidation with the Receiver. The major elements of the liquidation plan include the following:

* NPS, Lincoln and Memorial will be liquidated.
* When a death occurs that is covered by an NPS funded preneed contract, the state guaranty fund will pay out the face amount of the NPS insurance policy to the funeral home.
* Even for those NPS policies that were improperly converted to term life policies, borrowed against, or never purchased by NPS, the state guaranty fund will pay out the face amount of the preneed insurance policy that was or should have been purchased for the preneed contract.
* The state guaranty fund will not pay out any amounts toward the NPS' growth guaranty. Since the growth guaranty was provided by NPS and not by Lincoln or Memorial, it is not covered by insurance guaranty law.

The proposed liquidation plan will be filed with the Texas court and is expected to be approved. The Receivership will continue to pay NPS claims as they are submitted and hopes to cut down the time between claims being made and payment to thirty days or below.

Funeral homes that have preneed consumers paying installment payments on NPS contracts should advise their consumers to continue payments so the policies do not lapse. If payments are halted, the Receiver will be under no obligation to pay the face amount of the policies.

For the purpose of future litigation, funeral homes should track and record the amount of the growth guaranty which they are not receiving from NPS. It is also recommended that funeral directors open an NPS file in which they record each preneed contract where they have not received the guaranteed growth. Documentation should be provided to show the dollar amount of the growth that should have been received. While there is no assurance that amounts will later be recouped in future litigation, there is no harm in tracking the guaranty losses in case there ever is a settlement by or judgment against the owners of NPS.

OFDA members with questions regarding this matter can contact T. Scott Gilligan at (513) 871-6332.