Insuring the Association’s Funds
Federal Deposit Insurance. The Federal Deposit Insurance Corporation (FDIC) insures checking and savings deposits at member banks up to $250,000 per depositor per banking institution (not per bank branch). That means an association can have a dozen $250,000 CDs from twelve different banks, thereby having $3 million covered by FDIC insurance.
If a board places $500,000 in a single bank (to earn a higher return on its money) and the bank fails, the association loses $250,000. Boards should not exceed $250,000 per financial institution (unless the bank has private insurance to cover the monies). Instead, they should spread their association’s money across various FDIC-insured institutions. One way to conveniently spread the money is to use brokerage firms or banks in the CDARS program. See the FDIC website for more information about deposit insurance.
Private Insurance. Even if an association’s governing documents do not require FDIC-insured investments, boards should ensure their monies are insured. Some banks carry private insurance to cover deposits, including deposits that exceed FDIC limits. Other banks use surety bonds that insure the bank rather than individual accounts. While this reduces the association’s risk, it is not risk-free. There are two problems with the bond: (i) the bank is the named insured, not the association, and (ii) the insurance is limited to a specific dollar amount--if the bank fails, the insurance will only pay to its policy limits regardless of the aggregate amount in depositor accounts. It means any gap in coverage falls to the depositors, who may be paid only pennies on the dollar. If boards elect to use non-FDIC-insured accounts, they should ensure that their governing documents permit them to place funds with non-FDIC-insured institutions.
Crime Insurance. Beginning January 1, 2019, associations must purchase what the statute calls a “Fidelity Bond.”
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.