A fidelity bond, also called a "surety bond" or "employee dishonesty coverage" or "crime coverage," provides an association with certain levels of protection from losses resulting from dishonest acts by an association's officers, directors and employees.
Coverage Not Automatic. Employee dishonesty is not automatically included in an association's master insurance policy. Although inexpensive, the bond may need to be purchased separately. Virtually all HOA fidelity bonds cover theft by board members. However, that is usually not sufficient. Boards should make sure coverage
is extended to everyone in the association’s money-chain, including HOA
employees and management company principals and employees.
Amount of Coverage.
Fannie Mae
and Freddie Mac require coverage of 100% of an
association's current reserves plus three months of assessments but an association's governing documents may require a greater amount.
Boards should check their documents before establishing a bond amount.
If their documents are silent, boards should carry coverage in amounts
required by Fannie Mae or better. To limit losses, boards
should also set up
internal controls.
Management Company Bonds.
Management companies should carry their own fidelity bonds but there are significant potential problems if an association relies on a management company's fidelity bond to protect the association from losses resulting from the dishonest acts of management principals or management company employees. Following are some of those problems:
Coverage Not Assured. Most policies are designed to cover theft of management company monies by management
company employees. Normally, their policies will not cover the funds of a third party (such as an association).
Company As Primary. A fidelity bond carried by a management
company will be in the company's name. Thus, even if the policy offers
theft protection, the association has no insurable interest and cannot
directly collect from the insurer. In other words, if an employee of the
management company steals from the association, the policy will pay
claims to the management company, not the association. The association
would have to rely on the management company to reimburse the board for
the loss. Depending on the carrier, associations can be added as “Joint Loss
Payees” on a management company's bond. If the insurer agrees, it will
pay jointly to the HOA and the management company in the event of a
covered loss.
Principals Not Covered. Traditional management company policies do not insure against theft by company principals--principals cannot insure against your own misconduct, only that of their employees. That puts associations at risk if the owner of the company is the one embezzling funds.
- Coverage Limits. Fannie Mae and Freddie Mac require coverage of 100% of an association's current reserves plus three months of assessments. How would a board know that a management company's bond is sufficient without full financial knowledge of the reserves and assessments of all associations managed by the company? If the management company has a million dollar bond, a small portfolio of large associations would easily blow past that limit, thereby leaving all associations at risk and violating Fannie Mae requirements. Moreover, the bigger the management company, the bigger the problem.
RECOMMENDATION: The best approach for associations is to have a fidelity bond in the name of the association with a "managing agent rider" extending coverage to the dishonest acts of the management company, including the principals. As the first named insured and policyholder, the association would then have the right to submit a claim, control coverage limits (which are not shared with other associations) and receive notification in the event the policy is canceled or modified. A management company's
bond may provide some additional protection but boards should not
rely on it as their sole remedy. It should only be a backup.