We recently found someone who likes to geek out on the intricacies of fiscal sponsorship as much as we do!
And that someone is Colleen Lazanich, CEO of CalNonprofits Insurance Services (right), which offers a full range of employee benefit and general liability coverages and provides exclusive nonprofit insurance programs.
In this first of two posts that came from our conversation, we focus on the issues of pitfalls for fiscal sponsors – and how they can better manage their risk. (You can find the second post, which focuses on insurance best practices for projects separating from their sponsors, here.)
The following transcript has been edited for clarity and length.
Schulman Consulting: Let’s start with your experience working with fiscal sponsors and fiscal sponsorship through the insurance and risk lens. Do you work with these types of organizations regularly?
Colleen Lazanich: Going back in my history a little bit, I used to work on the insurance carrier side and we insured some large fiscal sponsors. And so that was the first time I came across organization that really focused on fiscal sponsorship. We got really creative with the broker on how we could manage the ever changing exposures because these organizations have projects going on and off all the time.
Some projects were one-time events, sometimes they think they’re going to form and they get started but then find they are not really viable and they leave soon after. And so that’s very challenging for an insurance company to manage because they have to know the operations of all of those projects.
It took a little while to convince our underwriting officers that this was a good thing to do. For this particular Fiscal Sponsor, the projects fit into 4 or 5 buckets of similar projects based on the type of work they were doing. We were able to manage the risk and be flexible with projects coming on and going off all the time by reviewing periodically and making adjustments at that time.
SC: And what about organizations that act as fiscal sponsors on a more ad hoc basis?
CL: [At that time], I wasn’t really aware that some smaller nonprofits were doing this quite casually until I started really delving into this whole issue more.
Very recently [Ed note: earlier in 2019], NIAC (Nonprofit Insurance Alliance of California), started attaching a fiscal sponsorship exclusion to its policies. It basically says, if you have a loss and it’s a fiscal sponsorship or fits the definition of fiscal sponsorship and you didn’t disclose it to us, it’s not covered by our insurance. Soon thereafter, we had a client have a loss at a project and it was not listed. They had other ones listed, but they didn’t have that project listed.
Before NIAC starting doing that, nobody else had ever asked that question before. And we were all surprised to discover many, many nonprofits are doing this some with written MOUs or some written agreement and others without any written agreement. And [many of these organizations were] very cavalier about the potential impact could be to their insurance.
But we’re starting to see underwriters ask, especially if it shows up anywhere on the organization’s website or on their financials or their 990. They’re starting to now. Underwriters are getting smart and realizing this is an issue.
[These nonprofits are] risking having an uncovered loss.
SC: So when you talk to organizations and they say, “We can’t afford the additional insurance or we’re afraid of what it’s going to cost,” what is your response?
CL: We’ve actually had clients tell us, “Well, I don’t want to list them all for the insurance company because then they’re going to charge me for them.”
They know the game. And response is: you should be passing that cost on to the project.
If you don’t have other insurance covering whatever the project is doing, whether it’s a single special event or whatever it is, if you don’t have some proof of insurance covering that thing and making sure if they have employees that there’s workers comp and covering all their operations and naming you as additional insured, then you’re accepting that liability and whether you have it insured or not, could be up in the air depending on who your insurance carrier is.
SC: That sort of response [from the nonprofit] seems to point to a larger issue with risk management, no?
CL: With any insurance and risk you first have to identify that there is risk. And until you identify that the risk is there then you’re accepting the cost whether you know it or not.
But once you’ve identified it, then you can get into how are you going to manage it? One way is they have their own insurance and they name you as additionally insured. The other way is you put it on your policy and you pass the cost over to them out of the funds that you’re passing through your organization because you’re incurring a cost because of the project.
And the other thing that comes up related to risk, but not to insurance, and could highly impact an organization is this: if we’re being naive about all these other things, are we ensuring that whatever the project is doing fits within your mission because then you’re risking your 501(c)3 by going outside the scope of your mission. I don’t think people aren’t talking about that part either.
SC: It’s definitely something I see that people are pretty loose with. And it’s one thing for organizations whose mission is to be a fiscal sponsor or however they word it. But if you’re another organization that has a specific mission, and you take someone on because it’s a friend of the Board Chair that’s doing something that’s not even close to your mission, you could ultimately have big issues.
CL: And let’s stay with the Board of Directors – if they know about this they have liability from the Directors and Officers policy for making the decision to do it. That’s if they know about it, hopefully they do. And if not, there are likely other issues with governance in general, right?
SC: You can definitely go down the rabbit hole on that one! But assuming organizations are trying to do the right thing and being above board, what are some ways that they can make sure that the insurance coverage they have is adequate?
CL: Well, the first thing to manage the risk is to have a written [fiscal sponsorship] agreement as to what’s included, you know everything should be spelled out, what they’re doing, how it fits within the mission. And if there’s administrative fee being taken out of the funds that are being donated, exactly what that fee is.
But the biggest thing is if it fits within your mission, you have to understand what’s actually happening at that project. Whether it’s one time or ongoing project, what’s happening there. And what are the impacts to the different areas of your insurance? Does it impact your general liability? What about property insurance? Is there an impact to your workers’ comp? Are there employees? And then if there are employees who’s handling the payroll, the benefits, the administrative, cause they’re your employees [in a Model A scenario]. So, are you treating the employees differently from between the two entities? I think sometimes people think of them as a separate organization.
SC: So for the organizations that do this as their mission, you mentioned earlier about every time someone comes on and off, that would be ideal to have a review of some kind, but it’s not practical in those situations where they literally have people coming off and on every month.
And you said something that I want to make sure is clear, which is: that the thing that triggered a change in a policy would be new properties coming on board. Is that correct?
CL: Yeah, because typically [the property owner/manager] will want proof of insurance, so like where we see that is, oh, we’re adding another location and you can dig into it a little bit, but oftentimes they don’t tell us that.
SC: So if an organization like that was adding a new project that was maybe something small that wouldn’t trigger a change in insurance?
CL: Nope. You wouldn’t get that.
SC: And would you as the person handling that from, from your side, would you have a different way to calculate what their coverage should be or the premium should be to account for some of that uncertainty or, or variability?
CL: Yeah, it is something that factors in.
And part of that is because many insurance brokers don’t understand the risks and the impacts of [insuring an organization that provides fiscal sponsorship]. That’s one of the benefits of having a broker that understands nonprofits. I think there’s enough nonprofits that don’t understand it, and they’re certainly not explaining it to their broker either. So they don’t explain it to the brokers. And the brokers don’t know the questions to ask because they’re not looking for it. We’re looking for it all the time because now we know that there’s more and more fiscal sponsorship arrangements taking place.
So we just have to talk about fiscal sponsorship more [Ed note: Colleen has written a great blog post with actionable information for fiscal sponsors here.]. I’ve been talking about it in every Webinar or class that I do on any level of insurance and will continue to do that.
SC: I couldn’t agree more.