What is fiscal sponsorship? What are the risks? Does it impact my insurance?
Fiscal sponsorship is an arrangement between a project and a 501(c)(3) nonprofit where the nonprofit sponsors the project they lack their own tax exempt status. There are a few different models of fiscal sponsorship, and they all have some impact to your insurance program.
Two Most Common Types of Fiscal Sponsorship
- Direct Model – the project is not a separate legal entity and belongs to the 501(c)(3) nonprofit sponsor. The sponsor is responsible for ensuring the project fits within their mission. Sponsor is fiscally and legally responsible for the project. This is the most common type.
- Grant Model – the project is a separate legal entity. The project and the sponsor enter into a grantee-grantor relationship. The project writes a grant request to sponsor for monetary exchange. Project maintains is own legal and tax filing responsibilities. Sponsor is fiscally responsible for the project.
Considerations for Sponsors
- Does the project have a similar mission statement – missions should be aligned or sponsor risks their tax exempt status
- Does the project already have a legal entity, infrastructure, resources and insurance?
- What infrastructure and resources will the project require from the sponsor?
- Is there any reputational risk to the sponsor since the funds will be raised in the sponsor’s name?
Considerations for Projects
- Is the mission of the project aligned with the mission of the sponsor
- What resources and infrastructure will the sponsor provide?
- Can the sponsor provide the support the project needs?
- What reporting will the sponsor require?
- How much is the sponsor charging for administration fees?
How does Fiscal Sponsorship Impact Insurance?
Under the Direct Model of fiscal sponsorship, the sponsor is responsible for the project in every way. The sponsor must include the project as though it is a program of the sponsor as it is liable for everything that the project does. The sponsor must include all revenue and expenses on their financials. Project personnel are employees and volunteers of the sponsor and must be subject to the same policies and procedures used in the organizations.
Insurance Considerations – Direct Model
- General Liability – All operations of the project must be included in the application. The carrier may require a copy of the Sponsorship agreement. Some carriers are excluding Fiscal Sponsorships unless they are disclosed on the application. It is a good idea to disclose them at renewal even if operations were previously included.
- Directors & Officers – The board should approve all Fiscal Sponsorships to ensure they fit within the mission of the organization. The board should ensure that projects adhere to the same policies and procedures as the organization.
- Employment Practices Liability – The organization could be served with wrongful termination, discrimination, wage and hour and other employment related claims from the project.
- Workers’ Compensation – Any employees must be included in the reported payrolls and classifications.
- Volunteer Accident – include the project volunteers on the policy
Under the Grant Model the sponsor is only responsible fiscally for the project. The Sponsorship Agreement or Grant Agreement should clearly spell out each party’s responsibilities. The board of directors for the sponsor organization should approve each grant. The grants should be aligned with the mission of the nonprofit.
Insurance Considerations – Grant Model
- General Liability – Project should indemnify the Sponsor and list the sponsor as additional insured to their policy. Sponsor should disclose the project and agreement with carrier.
- Directors & Officers Liability – Board should approve all grant projects, could be held liable for decisions made to sponsor project.
- Have Agreement in Writing – outline responsibilities of each party
- Board Approval – Sponsor’s board of directors should review and approve each Fiscal Sponsorship
- Sponsor Controls Funds – Sponsor should direct and control the money as donations are in their name
- Oversight – Ensure appropriate methods of oversight are followed
Further Information on Fiscal Sponsorship –