State of Iowa

Citizens’ Aide/Ombudsman

September 1, 1999

 RE: Investigative Report 98-3

State Insurance Division

DES MOINES — The State Insurance Division was unreasonably lax in overseeing a Clinton funeral home’s efforts to correct problems involving about 1,500 customers, according to a report released today by Citizens’ Aide/Ombudsman Bill Angrick.

Those customers stood to lose about $3.5 million when Clinton Memorial Park Cemetery & Funeral Home, Inc., went out of business in 1994, three years after the Insurance Division initially found the business had violated state laws concerning pre-need funeral and cemetery arrangements.

The Insurance Division acted to reduce those losses — primarily through a court-ordered receivership which recovered $1.6 million for consumers, and also helped to arrange for credits offered by the new owner.  But not all customers were eligible for the credits, and most who were had to make additional payments to get what they had previously purchased.  The 38-page report said it’s uncertain how much the losses were reduced through the credit offers and insurance claims.

Considering the financial and emotional toll on customers, the Ombudsman wrote that his review “indicates that for at least some of those customers, these adverse affects may have been avoidable and unnecessary.”

The Insurance Division first became involved in 1990, when it learned about possible problems with Clinton Memorial’s accounts involving pre-need customers — people who had purchased, or were in the process of purchasing, products and services before the time of need.

After a year-long investigation, the Insurance Division in 1991 found several violations of state law.  The violations primarily involved shortages in the amount of payments in trust and the number of products that were warehoused.  The violations didn’t appear to be intentional, and while the Insurance Division could have taken severe enforcement action, such actions in other cases tended to harm the business, and ultimately harmed consumers.

As a result, the Insurance Division tried a new approach, referred to as a “work out.”  The idea was to keep the business open with the expectation that it could make up the shortages through continued operations, with the Insurance Division setting goals to be met by specified deadlines.  “Under the circumstances, the Ombudsman admires the Unit’s decision to try this new approach, with the ultimate goal of helping Clinton Memorial’s customers,” the report said.

“The Unit’s follow-through, however, was inadequate,” the Ombudsman added.  “After finding statutory violations had already occurred, the complex and abstract nature of the pre-need funeral industry obligated the Unit to proactively look for any further signs of trouble.  But the Unit either wasn’t looking for them or failed to appreciate their significance.”

For example, while Clinton Memorial was specifically ordered not to make any new pre-need sales from July 1991 to May 1992, it made nine new sales in that time.  While three of the sales were contained in a report received by the Insurance Division in April 1992, there is no indication the Insurance Division was aware of that fact a month later when it partly reinstated Clinton Memorial’s license to make new sales.

In January 1993, the Insurance Division fully reinstated Clinton Memorial’s license to make new sales, even though regulators initially objected to the idea.  In addition, the Ombudsman’s investigation found that Clinton Memorial had made relatively little progress towards its goals at that time.  Under the circumstances, “the decision to fully reinstate Clinton Memorial’s establishment permit was unsupportable and unreasonable,” the report said.  “Twenty six new customers ultimately lost a total of $49,850 as a result of this decision.”

In March 1993, the Insurance Division received a report showing Clinton Memorial in 1992 received about $177,000 for pre-need contracts sold in previous years, but put none of those monies into trust.   Though the Insurance Division said that report triggered an audit which found extensive problems, it did not act on that report for eight months, for reasons that are unclear.  “Whatever the reasons, the Unit’s failure to respond gave Clinton Memorial another eight months to misappropriate pre-need income and merchandise,” the Ombudsman wrote.

In the end, the report said it’s unclear whether Clinton Memorial’s “trusting deficit” for pre-need accounts was reduced as a result of the “work out.”  It adds that of the 303 pre-need customers who made payments after the “work out” began, most (278) lost money — a net loss of more than $200,000.

The report acknowledged that regulating the pre-need funeral and cemetery industries can be complicated and time-consuming, and that the Insurance Division does not have unlimited staff and resources.  “However, if there is a lesson to be learned from the Clinton Memorial experience, it is that the Unit should not undertake any similar ‘work out’ efforts unless it can proactively look for warning signs,” the Ombudsman wrote.  “As this experience showed, a ‘work out’ carries the risk that aggregate consumer losses can actually grow.  Unless the Unit can ensure that won’t happen, it is not a risk worth taking.”

In his response to the report, Craig Goettsch, Superintendent of Securities for the Insurance Division, defended the agency’s performance and disputes a number of the Ombudsman’s findings and conclusions. “There is no question that our work on the Clinton case was hurt by the lack of staff,” he wrote.  “Given the limited staff and resources, we were able to accomplish a great deal in this case.”

“Frankly, the message we receive from the report is that the safe course for the office is to take immediate licensing action against violators of statutes,” Goettsch added.  “The message becomes ‘don’t exercise discretion and don’t act in the public interest as a whole.’”

Dennis Britson, director of the Insurance Division’s Regulated Industries Unit, wrote, “Sometimes, no matter what you try, or how hard you try, things still don’t come out well.  This aptly describes the Clinton Memorial case.  It was not one of the Bureau’s success stories.  We truly regret the financial losses and emotional distress of Clinton Memorial’s customers.  We will proceed differently should we ever have a similar case in the future.

“However, that differs from a belief that our decisions were ‘unreasonable’ or an ‘abuse of discretion’ at the time they were made,” Britson added.  A copy of the Insurance Division’s unedited reply is appended to the report.

Copies of the report can be obtained from the Ombudsman’s office, which can investigate complaints about most agencies of state and local government.  Iowans can call the office toll-free at 1-888-IA-OMBUD (426-6283) or at (515) 281-3592.  The office has a TTY which can be reached using the toll-free number or at (515) 242-5065.  Its fax number is (515) 242-6007.  Internet users can contact the office at:

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Last updated: Wednesday, October 18, 2000