Fidelity Insurance
Adams Stirling PLC


Employee dishonesty and theft (see embezzlement) constitute an association's largest exposure to crime. "Employee Dishonesty Insurance" is also referred to as:

  • fidelity bond

  • crime coverage

  • employee dishonesty bond

  • crime fidelity insurance

This coverage protects against losses resulting from dishonest acts by an association's officers, directors and employees. A related category of coverage is "Cyber Crime Insurance" which may or may not be included in a basic employee dishonesty policy. Boards need to ask about cyber crime coverage when they purchase a fidelity bond.

Employee Defined. It is important to ask how the crime policy defines "employee." Associations want the broadest possible coverage to include board members, committee members, managers, bookkeepers and anyone else who may have access to the association's money.

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. Boards should check their association's governing documents to determine what minimums may be required. If their documents are silent, associations should, at a minimum, carry the coverage amounts required by Fannie Mae, i.e., 100% of the reserves plus three months of assessments. Because budgets and reserve balances change annually, boards should review the bond each year and make appropriate adjustments to ensure sufficient coverage. To limit losses, boards should also establish internal controls

Management Companies. 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:

  1. 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).

  2. 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.

  3. 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.

  4. 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.
Because of the risks described above and because most master policies do not automatically include managing agents in their coverage, boards must ask the insurance broker to include in their fidelity bond a "designated agent rider" or "managing agent rider." Putting the fidelity bond in the association's name with a "managing agent rider" means the association has the right to submit a claim, control coverage limits and receive notification in the event the policy is canceled or modified.

Reporting Requirements. Actual and potential claims must be timely reported to the association's insurance carrier or the association may lose coverage.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC