October 9, 2007
PRE-NEED FUNERAL SERVICES CONTRACTS
By: Daniel Duffy, Principal Analyst
You asked for a summary of state law on pre-need funeral services contracts.
By law, a “funeral services contract” is one that is purchased before services are required and in which a funeral director obligates a funeral home to provide specified funeral services and merchandise. With one exception, the law requires the money paid for the contract to be deposited into an escrow account until after the services have been provided. It also requires these contracts to include certain information, such as the list of any selected goods and services to be provided, a description of any price guarantees, and a statement that the purchaser should receive a receipt of the initial deposit of funds into an escrow account from the escrow agent by the 25th day after the funeral director receives the deposit. Further, the contracts must state that if merchandise specified in the contract is not available at the time of death, that the home will supply similar merchandise.
The law restricts who may be an escrow agent for the deposited funds and how the agent may invest them. It establishes a means by which someone may cancel a revocable contract and limits the value of an irrevocable contract to $5,400.
A violation of the funeral services contract law is an unfair trade practice and violators are also subject to criminal penalties.
FUNERAL SERVICE CONTRACTS
The law allows only licensed funeral directors to sell pre-need funeral service contracts in association with funeral homes. The law defines a “funeral service contract” as one under which, in return for advance payment, a funeral director agrees to provide a funeral, or other funeral services or merchandise, or to dispose of a dead human body. The law requires sellers to be licensed as funeral directors by the public health commissioner.
The law requires these contracts to include:
1. the beneficiary's and purchaser's names, addresses, and telephone and Social Security numbers;
2. the funeral director's name, address, and telephone and license numbers;
3. a list of the selected goods and services, if any;
4. the amount paid or to be paid by the purchaser, the payment method, and descriptions of how the funds will be invested and how the law limits investment options;
5. a description of any price guarantees the funeral home makes or, if there are no guarantees, a specific statement that there are none;
6. the escrow agent's name and address;
7. a written statement, in clear and conspicuous type, that the purchaser should receive a notice from the escrow agent acknowledging receipt of the initial deposit by the 25th day after the funeral director receives the deposit;
8. a description of fees to be paid from the escrow account to the escrow agent or a third party provider;
9. a description of the purchaser's or beneficiary's ability to cancel a revocable pre-need funeral service contract and the effect of cancelling it;
10. for an irrevocable contract, a description of the beneficiary's ability to transfer it to another funeral home; and
11. the signatures of the funeral director and the purchaser or his authorized representative.
The law requires these contracts to state, if particular merchandise specified in the contract is unavailable at the time of death, that the home will furnish merchandise similar in style, and at least equal in quality of material and workmanship, to that provided for in the contract.
The law requires a funeral home to keep a copy of each funeral service contract it enters into or has assigned to it and a list of each escrow account established under them. The list must include the escrow agent's name and address, the amount deposited with the escrow agent, and the purchaser's name and address. A home must keep a contract for six years after completing the contracted services. The law requires a funeral home to disclose this information to the public health and consumer protection commissioners and the attorney general on request.
The law requires a funeral home to notify each pre-need contract purchaser of a transfer of more than 50% of the home's ownership or of its closure within 10 days after the event (CGS § 42-201).
By law, a funeral service contract is not deemed to be a burial insurance policy. Thus, a funeral service contract seller is not subject to regulation by the insurance commissioner (CGS § 42-205).
The law requires a funeral home to deposit the money it receives under a contract in an escrow account within 15 days of receiving it and requires the escrow agent to notify the purchaser in writing, by the 10th day after the initial deposit, of the agent's receipt of it and its amount. Further, the agent must notify the purchaser whenever transferring the funds or securities, other than transfers made to pay for services required by the funeral services contract. The law prohibits transfers of contract deposits to an insurance contract unless (1) the funeral director describes the fees, costs, or commissions associated with the insurance contract to the purchaser and (2) the purchaser gives his written consent.
An appointed escrow agent must administer each account. The funeral home depositing the money must appoint an agent who is: (1) a national banking association, (2) a state bank and trust company, (3) a federal or state chartered savings bank or savings and loan association, (4) a licensed insurance company, or (5) a registered broker-dealer.
The law prohibits investing escrow account assets in anything other than (1) deposit accounts insured by the Federal Deposit Insurance Corporation; (2) accounts insured against loss of principal by a United States government agency or instrumentality; (3) bonds in which savings banks may invest; (4) bonds issued by the United States or one of its agencies or by the State of Connecticut or one of its municipalities; (5) insurance contracts with a Connecticut-licensed insurance company that keeps at least a B plus rating for security by A.M. Best; or (6) any other deposit account, insurance contract, or security of comparable quality, safety, and cost.
Interest, dividends, and other income must be kept in the account and credited, less administrative expenses, to the respective interests of those for whom the account is being maintained. Each party to the contract must receive an annual statement of the amount credited to the account. The escrow agent's name and address must be in the statement (CGS § 42-202).
PAYMENTS FROM THE ACCOUNT
Assets may not be taken from the fund (1) until the services are provided or the merchandise is delivered or (2) unless the purchaser defaults on his payments. The escrow agent must pay the funeral home the total amount held in the account for the contract beneficiary after the home submits proof that it has fulfilled the contract. If the home does not fulfill the contract promptly after the beneficiary's death, a family member, next of kin, or the beneficiary's legal representative may pay for the funeral and may receive the money in the account from the escrow agent. An affidavit signed by the payor and the funeral home's representative is sufficient to authorize the agent to pay without liability. The law states that this does not relieve the funeral home for liability for its nonperformance.
If a purchaser defaults, or if the person responsible for making funeral arrangements does not have the home provide the services, the home may keep the origination fee and costs actually and reasonably incurred as liquidated damages, if this amount is not more than 5% of the amount in the account. The balance must be paid to the purchaser on request (CGS § 42-203).
A purchaser or a deceased's legal representative may cancel a contract by giving written notice to the home and escrow agent. If a contract is cancelled, all the money in the account, including interest but less actual and reasonable costs, must be paid to the purchaser or legal representative (CGS § 42-204).
IRREVOCABLE PRE-NEED FUNERAL CONTRACTS
An irrevocable pre-need funeral contract is one in which the money in escrow may be disbursed only after the beneficiary's death. The law limits the value of these contracts to $5,400, but all interest earned by the account is credited to it and is inaccessible to the beneficiary. The law allows these contracts to be transferred from one funeral home to another at the beneficiary's request. The law explicitly provides that purchasing an irrevocable contract does not preclude the purchase of other revocable contracts, but allows a Medicaid beneficiary to revoke a revocable contract only after giving written notice to the social services commissioner (CGS § 42-207).
Unfair Trade Practice
By law, a violation of these provisions is also a violation of the Connecticut Unfair Trade Practices Act (CUTPA) (CGS § 42-206). CUTPA allows the consumer protection commissioner to investigate complaints, issue cease and desist orders, order restitution in cases involving less than $5,000, enter into consent agreements, ask the attorney general to seek injunctive relief, and accept voluntary statements of compliance. It also allows individuals to sue. Courts may issue restraining orders; award actual and punitive damages, costs, and reasonable attorneys fees; and impose civil penalties of up to $5,000 for willful violations and $25,000 for violation of a restraining order (CGS 42-110a et seq.).
Someone who sells a funeral services contract when not authorized by law to do so commits a class A misdemeanor and is subject to a criminal penalty of a fine of up to $2,000, two years imprisonment, or both (CGS § 42-201).
Someone who arranges, promotes, or sells such a contact with the intent to defraud commits a class D felony and is subject to a criminal penalty of a fine of up to $5,000, one to five years imprisonment, or both (CGS § 42-206a). Someone who enters into such a contract and intentionally deprives its beneficiary or his estate or heirs of the contracted for services, property, or merchandise commits a class D felony CGS § 42-206b). The statute of limitations for these two crimes the earlier of five years from the date the (1) contract's beneficiary dies or (2) victim notifies a police officer or state's attorney, in their official capacity, of the crime (CGS § 42-206c).