Insurance can be expensive, but not having insurance is sometimes even more costly! One solution within many industries is risk pooling – that is, to join with others and effectively self-insure together, thereby spreading out risk and bringing down overall costs for protecting property and against liability. The insurance industry itself, however, is highly regulated and therefore requires state authorization for such programs. State-authorized self-insurance risk pools seem to be gaining traction in the nonprofit sector, with Florida, California and Washington State leading the way. This article provides highlights of the most recent risk pool expansion to nonprofits – in Washington State.
Under the new Washington law, nonprofit corporations located there will be permitted to pool resources with other, out of state nonprofits to create self-insurance risk programs/pools (“SIRP”) covering property or liability risks. A SIRP may be a good option for nonprofits because they are usually tailored to the unique risk-management needs of nonprofits. SIRPs often offer specialized training in addition to risk coverage to preemptively reduce nonprofit exposure. For nonprofits seeking different risk sharing arrangements for moral or other economic reasons, Washington State’s newly expanded SIRPs may provide a cost-effective alternative to traditional insurance solutions. .
In 2004, Washington State first allowed nonprofit corporations to form self-insurance risk pools. The 2004 law, however, was limited to Washington nonprofits and government entities. This year, the legislature received testimony in support of a new bill that would expand self-insurance pools to include out of state nonprofits. Washington currently has over 600 nonprofit entities in SIRPs. According to the law’s supporters, making the insurance pools available to out of state entities will further share the risk among more nonprofits and reduce costs.
In response to its advocates, Washington State Senate Bill 5119 was recently signed into law. The new law, which will be effective on July 24, allows one or more nonprofits to “jointly self-insure property and liability risks, jointly purchase insurance or reinsurance, and contract for risk management, claims, and administrative services with other nonprofit corporations.” The new law is designed to permit Washington nonprofits broaden their insurance risk pools and bring down the costs associated with such risk pools.
The new law contains two major provisions. First the bill creates a separate chapter in the statute to clarify that nonprofit corporations and local governments may not commingle for the purposes of creating SIRPs. Second, as stated above, the bill allows out of state nonprofits to participate in SIRPs with Washington State nonprofits.
Requirements and Exclusions
Nonprofits in Washington and other states may participate in the pools if the program satisfies a number of requirements. For example, ownership interest in the program is limited some or all of the nonprofits that are provided insurance by the program. Also, the participating nonprofits must elect a board of directors to manage the program. The programs are subject to prior approval by the State Risk Manager and are subject to extensive reporting and operational requirements. Nonprofits considering forming or joining a SIRP should consult with qualified legal counsel to fully understand the obligations attending participation.
Finally, nonprofits should be aware that provisions of this act do not apply to a nonprofit corporation that:
- individually self-insures for property and liability risks;
- participates in a risk-pooling arrangement, including a risk-retention group, a risk-purchasing group, or is a captive insurer authorized by its state of domicile;
- comprises only units of local government or is a group that comprises local governments joined by an interlocal agreement; or
- is a hospital or entity owned, operated, controlled by, or affiliated with such a hospital that participates in a self-insurance risk pool or other risk-pooling arrangement.
While Washington State’s newly expanded SIRPs do involve substantial operational and reporting requirements, they may provide nonprofits with an economical alternative for the management of their liability risks.