Crime insurance is an essential form of insurance for homeowners associations. Unfortunately, far too many HOA board members skip this insurance policy because they feel that it will never come into play. But, crime is something that can happen to any HOA.
In this article:
What Is Fidelity Insurance? What Does Crime Insurance Cover?
Crime insurance, also known as Crime and Fidelity insurance, is a type of insurance that protects a homeowners association’s actual money inside of its operating and reserve accounts. It exists so that HOAs can thoroughly protect their finances from possible theft.
When it comes to HOA crime coverage, most standard Crime and Fidelity policies protect the association’s money from the following risks:
- Computer fraud
- Invoice padding or false invoices
- Wire fraud
The Importance of a Comprehensive Crime Insurance Coverage
Homeowners associations are complex organizations made up of mostly volunteer members from the community. They can also receive third-party assistance from HOA managers, accountants, employees, and other professionals. Volunteer or not, though, HOAs are vulnerable to crimes of theft and fraud. There seems to be a common misbelief that associations like these are unlikely to be affected by such forms of crime. After all, doesn’t everyone have the same best interests in mind for the association?
But, the unfortunate truth is that crimes like theft and fraud can happen to virtually any type of organization. Even those that primarily function as charitable organizations are open to such risks. Since homeowners associations tend to deal with a lot of money in their accounts, the temptation to steal will always exist. It is surprisingly not uncommon for people to doctor invoices and falsify bank records. HOAs that maintain debit or credit cards for association use have also had volunteers or even managers use such cards for personal reasons.
Of course, there are internal controls that HOA boards can set up to prevent these risks from turning into reality. Simply requiring more than one signature whenever someone withdraws money over a certain amount can already do wonders. But, while prevention is always better than a cure, associations have to accept the fact that theft is still a real possibility.
This is where crime insurance comes in. With crime insurance, if a board member embezzled funds, the association is protected from financial loss. The same applies to other scenarios covered by the policy.
Crime and Fidelity Insurance vs Employee Dishonesty
While they may sound like they cover similar things, Crime and Fidelity insurance is not the same as Employee Dishonesty. The key difference between these two types of insurance policies is who they cover.
Employee Dishonesty works much in the same way as a Crime Bond. Both cover crimes related to theft, but only if it was perpetrated by an existing or current employee. This includes board members.
On the other hand, Crime and Fidelity offer a much wider spectrum of coverage. Standard Crime and Fidelity insurance coverage includes:
- Past board members
- Present board members
- Future board members
- Committee members
- Community or HOA managers
- Accountants and bookkeepers
- Other volunteers
Additionally, Employee Dishonesty usually only offers protection against money stolen by an employee. In contrast, Crime and Fidelity cover the four primary types of stealing: computer fraud, check fraud, wire fraud, and the actual stealing of money. Many crime insurance policies also extend to third-party crimes. This means that, if someone not affiliated with the association commits a covered crime, the policy would have the HOA covered.
Because board members typically aren’t well-versed when it comes to insurance, many associations are actually underinsured or don’t have the proper policies in place. Some mistakenly believe that a simple Employee Dishonesty or Crime Bond is enough to keep the association’s funds secure, only to later find out the bitter truth. To ensure an HOA has sufficient crime coverage, board members must evaluate their insurance policies thoroughly. They can also enlist the help of an HOA management company to assess their insurance needs.
When considering coverage limits, the first place associations should look to are state laws. Some states have statutory requirements on how much is necessary for crime insurance. For example, in California, Civil Code Section 5806 requires HOAs to maintain crime insurance at least equal to or more than the combined amount of the association’s total assessments for three months and the amount of the reserves. In North Carolina, SB 491, which would require HOAs to have Crime and Fidelity coverage, has already been proposed.
In states where there are no requirements in place, associations should refer to their governing documents. The bylaws or covenants will usually dictate how much HOA fidelity coverage the association should carry. If no such guidance exists, associations should analyze their needs and decide on a coverage limit. Generally, the more money an HOA has and the more people handle that money, the higher the risk of crime. Therefore, it makes sense to take out a policy with a higher coverage limit.
The Cost of Crime and Fidelity Insurance
The annual premium for crime insurance will depend on a few factors, including the coverage limit, how many people have access to the funds, and the deductible amount. On average, a policy with a $25,000 limit and a $250 deductible will cost around $240 to $275 per year. A higher limit of $500,000 with a deductible of $2,500 will cost around $600 to $750 per year. Keep in mind that the insurer an HOA chooses will also play a part in determining the cost of crime insurance.
Don’t Risk the Crime
Too many homeowners associations run the risk of financial ruin because they lack adequate crime insurance coverage. They fool themselves into thinking that it can’t possibly happen to them and that everyone in their community is trustworthy. But, when money is involved, there is always a chance of theft and fraud. Sometimes, it happens gradually over the course of a few months or even years, which is why people don’t notice it until it’s far too late. With Crime and Fidelity coverage, though, associations can rest easy knowing their funds are secure.
An HOA management company can help homeowners associations evaluate their insurance needs and set up internal controls to safeguard its funds. Call Elite Management Services today at (855) 238-8488 or contact us online to learn more about our services.
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