Is Your Homeowners Association Protected by Fidelity Insurance?

Homeowners associations are extremely vulnerable to financial losses due to the dishonesty and theft or embezzlement by the association’s officers, directors, employees and management personnel. To protect against the exposure to such losses, homeowners associations should carry “Fidelity Insurance” or “Employee Dishonesty Insurance.” Such insurance is not typically automatically included in an association’s master insurance policy or other types of specified coverage, so it is important for association directors and management personnel to confirm with their insurance agents that this important insurance coverage is obtained.

When fidelity or employee dishonesty insurance policies are purchased, the policy language should be reviewed to make certain that the coverage extends beyond employees and includes board members, committee members, bookkeepers, property managers (principals and employees), and all others who have access to the association’s funds. If the policy in question does not include coverage for the acts of management company personnel and the association utilizes a property management company, the association’s directors should seek the addition of coverage for management personnel through an optional rider to their insurance policy that provides such coverage.

Because the governing documents of some homeowners associations may mandate that a certain minimum amount of fidelity insurance be carried by the association, it is important to review those governing documents before purchasing the insurance to make certain the insurance that is purchased is in accordance with the required amounts. In the absence of specified minimum amounts, associations should have coverage for the total amount of funds that are held in reserves plus an additional three months of assessments. Because these amounts are subject to change, association directors should reevaluate the appropriate amount of fidelity insurance they need each year when their policy comes up for renewal and make appropriate adjustments to make certain they have sufficient coverage.

Fidelity insurance coverage that is carried by an association’s management company will not necessarily protect the association from losses that result from dishonest acts committed by the management company’s principals or employees, and certainly won’t protect the association against losses that result from the dishonest acts of its own officers, directors, and employees. The fidelity insurance coverage carried by a management company typically affords protection to the management company for losses of their own funds by acts of their employees, and not funds belonging to a third party, such as a homeowners association.  Accordingly, a requirement for fidelity insurance will not be satisfied by the retention of a management company that carries their own coverage. Furthermore, insurance that is carried by a property management firm is in the management company’s name and a homeowners association that suffers losses due to acts of the management company’s personnel would not have a right to collect directly from the insurer unless the insurance carrier agrees to add the association to the policy as an “Additional Insured” or “Joint Loss Payee.”   Additionally, absent the insurance carrier agreeing to include the association on the policy, the association would have no way of knowing if the policy is terminated at some point in time after the management company was retained by the association.

Irrespective of the absence of a requirement for fidelity insurance in a homeowners association’s governing documents, all homeowners associations should carry an appropriate amount of Fidelity Insurance or Employee Dishonesty Insurance to protect against the very common, and real, risks of suffering substantial financial damage due to the dishonest acts of officers, directors,  committee members, bookkeepers, property managers (principals and employees), and all others who have access to the association’s funds.