Fidelity Bonds
Q. As a Board member of a community association, I am concerned about the security of our money. We have accumulated a fair amount in our reserves. While we have confidence in our manager, I still feel a need to have some comfort that our owner funds are safe. What standards are there for insurance coverage for people who handle association money? Is there a special kind of insurance?
A. A community association can suffer serious losses if employees or volunteers misappropriate association funds and, although it is rare, it has happened. The Virginia legislature adopted some new requirements in the Virginia Condominium Act this year that all associations and their management companies are required to follow. These new requirements became effective July 1, 2007 and include:
1. 55-79.74:01. Deposit of funds.
All funds deposited with a managing agent shall be handled in a fiduciary capacity and shall be kept in a fiduciary trust account in a federally insured financial institution separate from other assets of the managing agent. The funds shall be the property of the unit owners' association and shall be segregated for each account in the records of the managing agent in a manner that permits the funds to be identified on an individual unit owners' association basis.
To translate: the management company must establish a separate bank account (or more than one account) for each association they manage and keep all funds received for that association in that account.
2. 55-79.81. Insurance.
B. Any unit owners' association collecting assessments for common expenses shall obtain and maintain a blanket fidelity bond or employee dishonesty insurance policy covering the officers, directors, and persons employed by the unit owners' association, and any managing agent and employees of the managing agent. Such bond or insurance policy shall provide a minimum of $10,000 in coverage. The executive organ or managing agent may obtain such bond or insurance on behalf of the unit owners' association.
Essentially the same language set forth above in 1 and 2 appears in Section 55-514.2 of the Virginia Property Owners Association Act.
Employee dishonesty insurance provides coverage for the type of loss you describe. This coverage can be written either as a separate policy or added to a commercial package policy, which your association should already have in place. Though fidelity insurance is the appropriate vehicle for protecting against misappropriation, guidelines from the Federal National Mortgage Association and some associations’ governing documents require fidelity bonds instead of fidelity insurance. Still, there is little difference in the effect of one over the other, and both achieve compliance with the new requirements.
Take note that the new law requires a minimum of $10,000 in coverage; you must refer to your association’s governing documents to determine if your association is required to obtain a higher coverage amount. We strongly recommend that insurance policies be adequate to cover the money your association in the bank plus three months’ assessments. Even if the documents do not state an amount, your board must take into account what is prudent based on your funds that require protection. You should consult with your insurance advisor on this type of issue.
Even though fidelity insurance must now be obtained, associations must also set proper procedures for physical control over assets and for maintaining adequate documents and records.
Community associations should also:
· Use independent checks on employees.
· Use lock‑box deposits when appropriate.
· Require multiple signatures on operating accounts.
· Sharply limit access to reserve accounts.
· Conduct periodic audits.
By following these guidelines and complying with the new laws’ insurance requirements, association’s can reduce the risk of incurring a financial loss.