Alabama Preneed Funeral Merchandise and Services Contracts Bond

What Is the Purpose of the Preneed Funeral Merchandise and Services Contracts Bond?

Preneed certificate holders are required to obtain a surety bond with the State of Alabama Department of Insurance (ALDOI). The ALDOI ensures the general welfare of the public by requiring the bond, which is provided by a third party (surety company) to guarantee reimbursement to financially harmed person(s) for a certificate holder’s failure to abide by the laws, regulations, and rules.

Who Needs the Alabama Preneed Funeral Merchandise and Services Contracts Bond?

Any funeral establishment, third-party seller, cemetery authority, or person who has been approved for a certificate of authority to sell preneed funeral merchandise and service contracts needs a bond. The bond must be approved by the ALDOI Commissioner in lieu of a merchandise and services trust required under Section 27-17A-13 of the Code of Alabama, 1975. All persons obtaining a permit must be a cemetery authority or licensed as a funeral director or establishment.

What Do Surety Underwriters Need to Know About the Alabama Preneed Funeral Merchandise and Services Contracts Bond?

The bond form specifies that the surety company must remit payment when a certificate holder defaults according to Title 27, Chapter 17A of the Code of Alabama, 1975 (Alabama Preneed Funeral and Cemetery Act).

The bond limit is based on the retail amount of merchandise, services, and cash advances (outstanding liabilities), and the entity’s cost to provide the undelivered merchandise or services sold on preneed contracts written after April 30, 2002. The preneed certificate holder is to use accounting principles to submit a report of outstanding liabilities to the ALDOI based on the previous calendar quarter and projected future liability for the upcoming quarter. The report is compiled at the end of the preneed certificate holder’s fiscal year and updated quarterly. Therefore, the bond amount can increase or decrease with the changes in liabilities.

Civil actions can be brought against the preneed funeral certificate holder for violating any provision of the Act by the Department of Insurance Commissioner, the Attorney General, or any other person or entity. In addition, certificate holders may be charged with felonies and misdemeanors in accordance with Section 27-14A-22. The Commissioner can also revoke or suspend the certificate of authority or impose a fine. With the Commissioner’s involvement in the violation process, bond claims are often a result of a certificate holder’s noncompliance with the ALDOI and regulations.

After consulting with industry experts, it is proven that Alabama certificate holders pose less risk when compared to the national average loss ratio, according to surety industry experts. However, there is still some risk involved and it is recommended to review the credit of the certificate holder, along with business and personal financial statements. A thorough review of each applicant mitigates the risk for the surety company.

The surety company is able to request cancellation of the bond, but only with a 60-day written notice.

What Do Surety Claims Handlers Need to Know About the Preneed Funeral Merchandise and Services Contracts Bond?

When a certificate holder is in default, and the ALDOI deems it so, the bond form explicitly states that the surety company must immediately remedy the default.

Although there is no specific legislation for surety bond claim handling timelines in Alabama, the Alabama Administrative Code lists the claims handling timeline for insurance carriers as follows: 15 days to acknowledge the claim and 30 days to pay or deny the claim upon proof of loss is filed.

Can a Preneed Funeral Certificate Holder Avoid the Bond Requirement?

Yes, but only if they have a bond alternative. A letter of credit is also acceptable. However, both the bond and the letter of credit are alternatives to the merchandise and service trust required under Section 27-17A-13 of the Code of Alabama.

How Much Does the Preneed Funeral Merchandise and Services Contracts Bond Cost?

The bond ranges in cost from 1-10% of the bond limit. The personal credit and business and personal financials of the certificate holder will help determine an appropriate rate.

How Is the Preneed Funeral Merchandise and Services Contracts Bond Filed?

The original bond form needs to be filed to the Alabama Department of Insurance with signatures from the surety company and certificate holder, and the Surety’s seal.

All documentation must be sent to the following location:

State of Alabama Department of Insurance
Preneed Division
PO Box 303351
Montgomery, AL 36130

Can the Preneed Funeral Merchandise and Services Contracts Bond Be Cancelled?

Yes, the bond can be cancelled by the Surety with a 60-day written notice. The surety company and the certificate holder are still liable during the 60-day cancellation period, so the Surety should take that into account for any potential prorated refunds.

Do Preneed Funeral Merchandise and Services Contracts Bonds in Renewable?

Yes, and the bond must be active for the duration of the certificate holder providing preneed funeral merchandise and services contracts. Bond terms are typically 1-, 2-, or 3-years long, but keep in mind the bond limit can be annually so adjustments may need to be made.