HOA fidelity bonds are critical to the operations of homeowners associations. But, what are these bonds anyway? And what do they cover?
What Are HOA Fidelity Bonds?
A fidelity bond is a form of insurance that protects homeowners associations from unanticipated financial losses such as fraud or theft. Other names for fidelity bonds include crime insurance or fidelity insurance.
While you may not want to even think about the possibility of losing HOA funds, it is a real risk that boards have to deal with. Associations usually work with volunteers, employees, and management companies. And while all of these people must put the community’s best interest first, there is always a risk of financial loss when someone violates their duty. For example, if an employee steals from the association, fidelity bond insurance for HOA can answer for the loss.
In general, fidelity insurance covers the following:
- Employee theft, which happens when volunteers, employees, or management personnel steal from the association;
- Forgery, which happens when checks or contracts are modified illegally;
- Loss of funds while in transit, which happens when funds are received but not recorded in accounts or statements;
- Funds transfer fraud, which can happen through electronic, telephonic, or written means; and,
- Computer fraud, which happens when someone uses a computer system to transfer HOA funds with authorization.
HOA fidelity bonds should extend coverage to all persons involved in the handling of association assets or funds. This includes board members or directors, officers, association employees and volunteers, HOA managers, bookkeepers, and management company personnel. There are also fidelity bond policies that cover fraud or theft committed by parties not directly associated with the HOA or the management company.
Why Should HOA Have Fidelity Bond?
All homeowners associations should have fidelity bond coverage. The Federal Housing Administration and Fannie Mae require HOAs to maintain this type of insurance policy.
Potential homebuyers may have their loans denied if an HOA does not carry adequate fidelity bond coverage. Additionally, some states, such as California, explicitly require associations to purchase fidelity insurance.
But, the importance of fidelity bond coverage goes beyond simple government requirements. Homeowners associations often handle large sums of cash and other assets. This is especially true for bigger communities with hundreds of homes.
The operating fund covers the regular expenses of the association, while the reserve fund covers the cost of major repairs and replacements in the future. It is normal for money to constantly move in and out of these accounts, so it is easy to miss signs of theft or fraud.
Even if an HOA establishes strict internal controls to protect association funds, people on the inside will always find a way to steal from the HOA if they so choose. Without fidelity insurance, an association would have no way of recovering its lost funds when faced with dishonest parties. The HOA would then face a budget deficit, forcing it to take out a loan, levy special assessments, or raise regular dues by a significant amount.
People typically don’t want to think about the negative scenarios that might occur. This is why a lot of associations are severely lacking in terms of insurance coverage. Board members would rather not think about the possibility of theft or fraud. But, board members also have a duty to protect the association’s funds, and securing coverage for the HOA’s assets is a big part of fulfilling that duty.
HOA Fidelity Bond Coverage Requirements
When it comes to coverage requirements, there are generally two things to check: government requirements and the association’s governing documents. Both the U.S. Department of Housing and Urban Development and Fannie Mae have certain requirements for HOA fidelity bonds.
According to HUD, an association must meet FHA standards for its fidelity bond policy. That means securing coverage for all of the HOA’s reserve funds as well as an amount equal to three (3) months’ worth of regular dues. Additionally, the policy must cover all of the HOA’s employees, board members, volunteers, and management company staff involved in the finances of the association.
Fannie Mae-backed loans also have additional requirements. These include coverage for three (3) months’ worth of scheduled maintenance fees and a deductible of $25,000 or less.
Some states have more stringent standards when it comes to fidelity bond coverage. Because exact requirements can vary from one state to another, it is best for associations to consult an insurance agent or attorney.
Boards should also refer to the association’s governing documents. Sometimes, the governing documents of an HOA will require a higher coverage amount and stricter standards. In that case, the association must follow the governing documents.
Coverage requirements don’t always stay the same, though, because the amount of coverage is dependent on dues and reserve funds. As such, HOA boards should review the association’s insurance policies every year. This way, boards can update their coverage to meet the requirements of the law and the governing documents.
Management Company Coverage vs HOA Coverage
Management companies usually have their own fidelity bond coverage already. In that case, does a homeowners association still need to purchase this policy? The short answer is yes.
An HOA management company’s fidelity insurance might only extend to its own staff members. That means if an HOA board member commits a dishonest act and steals from the association, the management company’s insurance may not cover the loss.
All associations should still purchase and maintain their own fidelity insurance policy. This way, they can cover board members, officers, volunteers, employees, agents, and management personnel. It is also a good idea to extend the coverage to all board members — past, present, and future. Spouses of board members are not immune to temptation either, so it is best to include them in the policy if permitted.
Protection in All Forms
Homeowners associations are vulnerable to all sorts of loss and liability. The best way to counteract this and protect the HOA is to secure sufficient insurance coverage, including HOA fidelity bonds.
Elite Management Services provides help with legal issues and insurance matters. Call us today at (855) 238-8488 or contact us online for a free proposal!
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