What is it, why is it so critical, and how much do you need?
I recently wrote an article for CAI’s Georgia Commons magazine that described how an unscrupulous property manager ran away with over $200,000 of an HOA’s money. The money was never recovered, and it turns out that the property manager was fabricating the financial reports while pocketing funds out of several client accounts. While situations like this are rare, is your community association covered for this type of catastrophic event?
Fidelity bonds for community associations
Based on my experience helping hundreds of community associations and HOAs with their tax, audit, and accounting needs, fidelity insurance is one of the more overlooked types of insurance coverage. Simply put, fidelity insurance, also known as a fidelity bond, protects the association in the event of theft or embezzlement of financial assets.
Most property management companies carry their own fidelity bonds, but (through no fault of the management companies) the bonds may not cover all situations and all community clients. Here’s why:
- May not cover the management company principals. Management company executives may not be covered under their own policies, so in the example above, the ripped-off community would be out of luck.
- Only covers the management company. What happens if one of your board members runs away with the association’s money? The property manager’s coverage won’t apply. Get your own coverage.
- Potential limitations on catastrophic loss. In the unlikely situation that someone walked away with all funds from all clients, would there be enough insurance to cover all losses?
HOAs and community associations should have their own fidelity insurance
Fidelity coverage is not normally included in the master association insurance policy. Fidelity bonds can be purchased separately and aren’t really that expensive. The fidelity bond needs to be carefully structured so that it covers anyone with access to the association’s money:
- Directors, officers, and board members.
- Property managers and management companies, even if they have their own bonds.
- Committee members with financial access.
Starting in 2009, Fannie Mae and Freddie Mac began requiring fidelity coverage equal to three months of assessments and 100% of the reserve account for town home and condo communities. I think this is a great rule of thumb for all communities, although your covenants may require something different. Think of the catastrophic impact that the theft of your association’s funds would cause in your community, and then make sure you have adequate coverage.
Review your association’s 2015 insurance coverage
Make an insurance policy review, including all association policies, riders, and endorsements, one of your board’s first risk management tasks in 2015. It could save your association a significant amount of money in the long run. If you need assistance, please give me a call. I do not sell insurance, but I can review coverage, walk you through alternatives, and introduce you to the right HOA and community association insurance experts.
Neal Bach, CPA