New law for pre-need plans
A separate trust fund is required to be created for each
By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 21:23:00 12/17/2009
Filed Under: Economy and Business and
Finance, Laws,Litigation & Regulations
NEXT year, pre-need companies and pre-need
planholders will be governed by new rules and
regulations.
Last Dec. 4, President Macapagal-Arroyo signed into law
Republic Act No. 9829, also known as the ?Pre-need
Code of the Philippines.? It will take effect 15 days after
publication in two newspapers of general circulation.
From a one-paragraph treatment in the Securities
Regulation Code, the pre-need industry has been given
a covering law of its own that lays down the guidelines
for its operation and the sanctions that will be imposed
for any violations that may be committed.
In recognition of the nature of pre-need contracts as
insurance products (rather than securities), Congress
transferred regulatory responsibility over pre-need
companies from the Securities and Exchange
Commission to the Insurance Commission (IC).
Among the notable provisions of the law is the authority
given to the IC to prescribe, pass upon and review the
qualifications and disqualification of directors and
officers of pre-need companies.
Directors
Similar to the ?fit and proper? rule that the Bangko
Sentral applies to bank directors and officers, this power
will enable the IC to ?maintain the quality of
management of pre-need companies and afford better
protection to planholders and beneficiaries.?
In addition, the law requires pre-need companies to elect
into their board of directors at least two independent
directors or 20 percent of the members of the board,
whichever is higher.
To avoid conflicts of interest, the law prohibits directors
and officers, in their personal capacity or acting as
agents, to have direct or indirect investments in excess
of P5 million in any corporation or undertaking in which
the pre-need company?s trust fund has an investment or
financial interest.
The prohibition also applies to their relatives within the
fourth degree of consanguinity or affinity while the
director or officer concerned holds that position in the
company.
It is in the establishment and handling of the trust fund
that the Pre-need Code takes to heart the protection of
the interests of planholders.
A trust fund is a fund created from the planholders?
payments to pay for the cost of benefits and services,
termination values payable to planholders, and other
costs necessary to ensure the delivery of benefits or
services as provided for in the contracts.
Trust funds
type of pre-need plan that the company may be
authorized to sell.
The management of the fund may be entrusted by the
pre-need company, subject to the approval of the IC, to
a reputable bank?s trust department, a trust company, or
any entity authorized to perform trust functions in the
country.
To ensure the accomplishment of the objective of the
trust fund, the law provides that its assets shall ?at all
times remain for the sole benefit of the planholders.?
No part of the assets can be used for or diverted to any
purpose other than for the exclusive benefit of the
stockholder.
Neither can the assets be touched to satisfy the claims
of the company?s creditors, nor can they be considered
part of the assets of the company that is subject to
distribution in case the company files for insolvency.
Furthermore, the law states that ?contributions to the
trust funds shall not form part of the income or gross
receipts of the pre-need company and therefore shall not
be available for dividend declaration.?
Protection
The prompt delivery of benefits to the planholders when
their plans mature likewise received particular attention
in the law.
If a pre-need company refuses or fails to pay the claim
within 15 days from maturity or due date, the beneficiary
will be entitled to collect interest on the proceeds of the
plan for the duration of the delay at the rate twice the
legal interest.
The only excuse allowed for any refusal or failure to pay
is if the claim is fraudulent.
By way of additional protection for planholders, the Pre-
need Code allows planholders to file an action in court to
recover their investments in the company in case it files
for insolvency or bankruptcy.
This is a radical departure from the traditional legal
concept that all collection claims against a company are
barred when it undergoes insolvency or bankruptcy
proceedings.
The directors and officers of the bankrupt company are
not off the hook though in this kind of situation.
If the insolvency or bankruptcy is a mere cover-up for
fraud or illegality, the planholders may file legal action
directly against them, including the company?s
controlling stockholders.
And legal action includes complaints for large-scale
swindling (which is non-bailable), falsification of private
documents, false affirmation and a host of other criminal
cases that can put the erring officer behind bars for the
rest of his rotten life.
Whether or not the Pre-need Code will live up to the
government?s expectations remains to be seen. As in all
laws, its value lies in its enforcement.