Is Your HOA Properly Covered for Losses From Dishonest Acts?

Because homeowners associations are controlled and operated by part-time volunteer members who serve as officers and directors and unrelated third-party mangers that are hired to provide management services, they are especially vulnerable to losses that result from the dishonest acts of these people. The risk of becoming a victim of a dishonest person who performs services for a homeowners association is compounded by the fact that there are substantial amounts of cash that flow into the association’s bank account every month with very little oversight as to what happens with those funds. Thus, for those people who are vested with responsibilities that provide access to the cash receipts of homeowners associations, there is opportunity to misappropriate funds. Recognizing this particular vulnerability of homeowners associations, state laws and association governing documents commonly include provisions that mandate the purchasing and maintaining of “fidelity insurance” by the association.

Fidelity insurance is insurance that is purchased by the association to protect against losses that result from “employee” theft. Typical insurance policies define an “employee” as an individual that is directed and controlled in the performance of their services and who is compensated directly by salary, wages, or commissions. Because the volunteer officers and directors, and the third-party property managers that they retain, are not “employees” under the typical definition of an employee, it is crucial that a homeowners association’s fidelity insurance policy contains language that expands the definition of “employee” to include officers, directors, committee members, and management company agents, bookkeepers and anyone else who has access to the association’s funds.

Losses that result from employee dishonesty are not always covered by a homeowners association’s master insurance policy and, in order to have the necessary coverage to protect against employee dishonesty, it may be necessary to purchase a separate policy that provides such coverage. Additionally, prior to purchasing the coverage, the association’s governing documents and state statutes should be reviewed to determine if there are minimum amounts of coverage that must be obtained. Aside from complying with the required minimum amounts of coverage, the association should have fidelity insurance limits that are sufficient to cover an amount that is equal to 100% of the association’s reserves plus three months of normal assessments. These amounts should also be reviewed annually and adjusted as needed to cover changes in the reserve balance.