Steps To Safeguard You and Your Association

  1. Have your attorney conduct a legal audit/checkup.
  2. Have all insurance policies reviewed by your attorney for coverage, as well as compliance with your governing documents.
  3. Amend your Articles of Incorporation to limit board member liability for breaches of fiduciary duty.
  4. Amend your Bylaws to provide for broad indemnification (reimbursement) of directors.
  5. Amend your Declaration to eliminate obsolete, poorly worded, and unworkable provisions.
  6. Upgrade your D & O insurance to provide comprehensive coverage for acts including injunctive relief, and for individuals, including committee members and your manager.
  7. Purchase fidelity insurance that covers not just employees, but directors and managers.
  8. Obtain adequate workers compensation insurance.
  9. Adopt written policies and procedures to govern effectively, including the nine policies required by Colorado law.
  10. Document in writing board and ACC/ARC decisions and actions and the reasons for them.
  11. Always comply with requirements of governing documents.
  12. Make informed and reasonable decisions.

Association Safeguards

This article addresses those key affirmative steps a board, on behalf of the association, should take in order to protect the association. Although the needs of every community are inherently different, the following steps are applicable to every association and will help boards stay informed about the status of their associations.

1.  Conduct a Legal Audit

Every year, shortly before April 15 we go to the proverbial closet, dig out the old shoe box, review the receipts stockpiled from the previous year, and prepare to explain the association to Uncle Sam- or at least ask him for an extension of time in which to explain it.

Through this process we not only become aware of what taxes need to be paid, we also discover where income is being derived and what expenses have been incurred.  In short, we get an overall picture of the association’s financial condition.  We seek information with which we can judge our past performance and plan our future conduct.

When it comes to examining the present status of the association’s legal affairs, however, the board seldom engages in such introspection.  Today, it is not always easy to know what is legally right or wrong.  Nevertheless, we all know ignorance of the law is no excuse for a transgression.

One solution is a legal audit.  Just as an accounting audit can give an organization a report on its financial position, legal counsel can be asked to conduct a periodic legal audit of an association’s operating procedures and report on its present legal status.  Such a preventive approach to legal situations is designed to enable an association to identify potential legal problems early, thereby minimizing legal risks and maximizing legal rights.

We usually have no need for counsel until some problem develops.  Then, we present to our attorney the facts germane to the problem. He or she advises on what our rights and obligations are under the circumstances.  Even when an association has counsel on retainer, the scenario usually remains the same.  The problem, once apparent, is presented to an attorney, who then attempts to devise a solution.

A preventive approach, however, brings an attorney in early to examine various aspects of an ongoing concern in an attempt to identify potential legal problems, thus avoiding uncertainty and costs, and preventing incipient legal problems from manifesting.  Any organization, for-profit or non-profit, can benefit from such self-exploration.

Unlike accounting, there are no set standards for conducting a legal audit.  The extent of the review must be tailored to the needs of the particular organization, and will be determined by such factors as the organization’s size, its areas of responsibility and, of course, the financial resources it chooses to devote to the project.  The scope and depth of a legal audit will depend on the particular characteristics of the association.

To start, the review need not be exhaustive.  Counsel may begin simply by examining the association’s governing documents (Declaration, Bylaws, and Articles of Incorporation) to ensure the association is operating in compliance with them.  Such an examination may include a review of voting practices, the use of proxies, notice and quorum requirements, the manner in which meetings are conducted, indemnification provisions, and limits as to board member liability.

The audit can be expanded to include an examination of the association’s service contracts, employment practices, insurance coverage, and compliance with the multitude of federal, state, and local laws pertaining to community associations.  A legal audit is limited only by the needs of the association and the creativity of counsel.

Whatever the scope of the inquiry, the legal review should be designed to:

  • report the current status of the association’s legal affairs;
  • assist the board and management in evaluating present and potential legal risks; and
  • recommend a future course of conduct.

An important caveat, however – just because an association has engaged an attorney to perform an internal review of its legal affairs, that is no guarantee that the association will not be involved in a lawsuit in the future.  The legal audit is not insurance, but merely a preventive measure which should be undertaken in an attempt to reduce risks, improve operations, and educate board members and management on the legal aspects of running a community association.

A legal audit is preventive law at its best.  By taking positive steps now to minimize your association’s exposure to liability, you will reduce the likelihood of expenditures for damages, attorney fees, and court costs in the future.  We developed the legal audit in response to associations involved in costly disputes or litigation that might have been prevented had the appropriate protections been in place.

A legal audit conducted by our office includes the following:

  • Review of your association’s governing documents, including Declaration (covenants), amendments, maps, Articles of Incorporation, and Bylaws.  This review will determine which provisions need clarification, supplementation, or amendment.  We will also determine whether the documents comply with the Colorado Common Interest Ownership Act (CCIOA) and other applicable state and federal statutes.
  • Legal transition review, if applicable. This includes a review of all of the documents the association should have received from the developer at the time of transition from developer to homeowner control.
  • Review of existing rules and regulations, resolutions, and policies and procedures for compliance with state law, federal law, and the association’s governing documents.
  • Review of all management and vendor/service contracts.
  • Review of minutes of Board meetings for the past twelve months.
  • Review of the minutes from the most recent annual meeting.
  • Review of the most recent audit report from association’s accountant.
  • Review of existing financial safeguards to protect the association’s funds.
  • On-site inspection of common areas/elements for recommendations to reduce liability.

Upon the completion of the audit, we prepare a written summary of our findings and meet with the board to discuss those findings, make recommendations, and answer any questions.

2.  Maximize Indemnification Provisions

The following are recommendations regarding indemnification provisions:

  • The Articles of Incorporation or Bylaws should provide for indemnification to the fullest extent permitted by law.
  • The provision should not limit or otherwise link the amount of indemnification to the availability of insurance proceeds.
  • The provisions should require indemnification, rather than merely permit the association to indemnify.
  • The provisions should require the advancement of defense expenses, subject only to an unsecured obligation to repay the expenses if a court subsequently determines the indemnification was not permitted.
  • The provisions may shift the burden of proof to the association to prove that the director or officer is not entitled to the requested indemnification.
  • The provisions may require the Association to reimburse the director or officer for any expenses incurred in a claim against the Association for such indemnification if the director or officer is successful in whole or in part.
  • The provisions may provide that the director or officer has a right to an appeal or an independent de novo determination as to indemnification entitlement.
  • The provisions may expressly state that the indemnification rights constitute a contract, intended to be retroactive to events occurring prior to its adoption and shall continue to exist after the rescission or restrictive modification of the provisions with respect to events occurring prior to that rescission or modification.  Alternatively, a separate indemnification contract could be executed by the association and the director or officer.

3.  Verify Adequate Insurance Coverage


One of the most significant, yet misunderstood exposures to liability facing a community association is professional liability, sometimes referred to as “errors and omissions.”  Traditionally, this exposure has been viewed and treated as personal liability that can be imposed by a court of law on individuals who serve as duly elected or appointed Directors and Officers of an association.  Associations have purchased standard Directors and Officers liability coverage to address this exposure on behalf of their individual Directors and Officers.

Coverage provided by the standard Directors and Officers liability policy is very narrow in scope.  It responds to third party claims brought against duly elected or appointed Directors and Officers which allege wrongful acts as defined in the policy –  which usually excludes the most common allegations.  Further, it provides coverage to the association, but only for the association’s obligation to indemnify individual Directors and Officers.  This obligation must exist prior to knowledge of any claim and is normally established through a provision in the association’s Bylaws.  Defense costs as well as actual damages are included in the policy limit.  While affording some coverage, the standard Directors and Officers liability policy does not adequately address today’s coverage need of community associations.

In the mid 1980’s a new, much broader form of coverage, called Association Professional Liability, became available.  This new form enhanced coverage by expanding the definition of who is covered by the policy.  In addition to protecting individuals who are duly elected or appointed Directors and Officers, the Association Professional Liability policy covers employees, volunteers, committee members, and other persons “acting at the direction of and on behalf of the Association.”  It also covers the association as an entity without restricting coverage only to the association’s pre-existing obligation to indemnify individual Directors and Officers.  This is critical, as many states, including Colorado, have statutes that limit the liability of those who serve as volunteer Directors and Officers of non-profit associations unless they act with willful or wanton disregard of the facts or with the intent to harm.  This statutory protection does not apply to the association as a business entity, therefore making it a much more preferable and accessible target to recover damages from.  Having this “entity” coverage is essential for associations in today’s litigious environment.

The cost for Association Professional Liability is normally $500 to $700 per year, more than the cost for the standard Directors and Officers liability policy.  However, the broad coverage provided in the Association Professional Liability policy is well worth the difference. It is an invaluable tool in protecting the association’s assets, as well as its individual members from financial loss.  If not already in place, you’re association should seriously consider maintaining Association Professional Liability coverage. Carriers which offer this coverage include Travelers Bond, Chubb, St. Paul, and CNA.  These carriers can be accessed through your local independent insurance agent or by contacting our office.


In recent years, at least two association managers responsible for managing funds for community associations have been terminated by boards investigating losses of large amounts of association reserve and operations accounts.  For the communities affected, this has not only meant scrambling to obtain records from officials and re-negotiating contracts with new management companies, but also mounting legal costs for filing lawsuits to recover stolen funds where it is uncertain if there will ever be any sort of financial recovery.  If certain steps were taken to protect and adequately insure community association funds, this nightmare could be minimized.

Every board of directors (and professional manager) should know the following basic principles regarding fidelity insurance or “employee dishonesty” insurance – coverage available at a relatively low fee to condominiums, cooperatives, and homeowners associations.  It protects the association if the community association manager (or the manager’s employee, the company’s principal or chief-executive officer) decides to take the association’s money and run.

PRINCIPLE #1.  The management company is the association’s agent and not the association’s employee.  Management contracts between an association and its management company almost always designate the management company as the association’s “agent” and not its “employee.”  This classification presents an insurance problem (and typically a rejection letter) if an association, after incurring a theft of property (which includes money, cleaning supplies, swimming pool chemicals and the like), attempts to file a claim with its own insurance carrier to recover stolen property.

The rejection letter typically states that because the management company is an agent and not an employee, no coverage exists under the employee dishonesty paragraph of the association’s insurance policy, the premiums on which the association has been paying for years.  What is not generally known to community associations is this problem can be easily remedied.

Most insurance carriers that sell association employee dishonesty insurance can add an endorsement to the policy which simply states that for purposes of theft, a management company will be classified as an “employee.”  Although this endorsement, Form CR-10-24-10-90, is generally made available by all insurance companies, many insurance agents are unaware of it.  It is generally not included as part of the employee dishonesty protection at the time the community association insurance is purchased.  Furthermore, in most instances, there is no extra charge for this endorsement addendum if an association has certain controls in place.

PRINCIPLE #2.  A second misconception among community associations is regarding fidelity insurance coverage. Association fidelity insurance is different from any insurance carried by management companies.  Most community associations do not understand why they should have their own insurance policy if their management company is “bonded” or has it own fidelity insurance coverage.  Simply put, insurance carried by a management company provides different coverage and protection than insurance carried by a community association.  (Does your employer’s auto insurance cover your car?)

One of the first differences between fidelity insurance held by the association and fidelity insurance held by the management company is who is able to file a claim with the insurance carrier.  For example, if a management company employs a community association manager who steals $100,000 from a reserve account belonging to an association, only the management company can file a claim with its insurance carrier on behalf of the loss suffered by the management company. The association has no direct claim on the proceeds of the management company’s fidelity insurance. In order to access such proceeds the association would need to file a lawsuit against the management company to recover the stolen funds.  Any legal fees incurred as a result of the filing of the lawsuit would have to be paid by the community association until a settlement was reached or judgment obtained.

If the association had its own fidelity coverage, however, it could immediately file its own claim with its own insurance carrier, who would pay the claim directly to the association (but who would turn around and go after the management company’s insurance carrier for repayment).  The association would not have to spend any of its hard-earned money on legal fees.

Another problem with management fidelity insurance coverage is there are limitations on the amount of the claim.  For example, most management companies are in charge of running many communities. They potentially have access to millions of dollars of association operating and reserve funds.  To our knowledge, there is no policy for management companies available to cover the aggregate amount of funds they manage. In all probability, the capped amount will not equal the aggregate amount of the total sum of funds for all associations managed by a particular company.  Thus, if a theft occurs of reserve accounts from six community associations which combined totals $3 million, no one community will ever receive 100 percent of its missing money – even if the management company’s insurance carrier paid the face value of the policy amount where there was a cap on the management company’s coverage available at the time. If an association had its own insurance policy, however, it would have an excellent chance of recovering 100 percent of the money taken, which is especially significant if the management company did not have sufficient blanket employee dishonesty coverage of its own.

Most insurance companies are reluctant or simply refuse to send a check to the very parties that pilfered the money.  This is especially true if the theft is by a management company principal.  Unfortunately, because the insurance was taken out by the management company in the first place, the insurance carrier will not pay the money directly back to the community or communities who suffered the loss at the hands of the management company.

PRINCIPLE #3.  Some community association board members mistakenly believe their own Director and Officer (D&O) liability coverage will protect the association in the event of a dishonest act.   Please take heed – your community associations’ D&O insurance coverage will not protect the association in the event of a theft. The board cannot look to its own D&O insurance policy to file a claim when the money is taken.

PRINCIPLE #4.  Management company agents are not insurance agents and cannot guarantee or advise the association regarding the adequacy of its insurance coverage.  Many associations fall into the trap of believing that their management company takes on full responsibility for the adequacy of association insurance coverage.  In reality, each association, through its board, is under a fiduciary responsibility to assume the risks and responsibilities of adequate insurance, including fidelity insurance.

Each community association board member, therefore, needs to learn about insurance products and adequate coverage.  Space constraints limit the volume of information that can be provided regarding adequate insurance; however, you should know where to start your investigation.

In general, community association insurance requirements, including adequate fidelity coverage, flow from many sources.  Each association should make the analysis of its insurance requirements a high-priority item – as important, if not more so, than choosing a landscaper or hiring an on-site community manager. This analysis will entail a review of the following:

  • Governing documents and related rules, regulations, and resolutions;
  • Federal, state, or local laws mandating insurance coverage;
  • Requirements of secondary mortgage markets; and
  • Good business judgment rules.


The board of directors – on its own or through an insurance carrier, attorney, or management company  –  should review the association’s governing documents for minimal insurance requirements.  Most documents actually require the association to carry its own insurance (property, casualty, fidelity, etc.) in a stated amount to cover board members, officers, directors, volunteers, committee chairpersons, employees, and even management agents.

The board, in its fiduciary capacity, should review the adequacy of its own fidelity insurance coverage, and, if necessary, adopt resolutions designed to clarify insurance obligations and record them in the appropriate land records.  No board member would enjoy seeing his or her name in the caption of a lawsuit filed by other board members alleging breach of fiduciary responsibility where the governing documents actually mandated coverage and none was in place.


Certain lenders, agencies, and professional organizations require specific levels of insurance coverage.  Boards should be aware that insurance requirements may be established by such lenders as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., and agencies such as the Federal Housing Administration and Department of Veterans Affairs.  Thus, the ability of residents in your community to obtain financing to buy or refinance their homes may depend on whether the board has adequate insurance required by the mortgage lenders and secondary mortgage market.


Board members should exercise prudent business judgment which involves the board undertaking several steps to safeguard and protect association funds.  These safeguards include:

  • Annual audit or review;
  • Review of original bank statements or operating and reserve accounts;
  • Full and separate control over association reserve accounts;
  • Sound investment policy;
  • Multiple signatures on accounts; and
  • Prompt review of monthly financial statements from the management agent.

Community associations should work hand-in-hand with their insurance providers to review the adequacy of their insurance coverage. An insurance audit conducted by our office includes a comprehensive review of the following:

  • Your association’s existing insurance,  including general liability, property, director and officer, workers’ compensation policies and related endorsements; and
  • The insurance requirements (types and amounts) in your governing documents to determine whether policy coverage meets the established requirements and sufficiently protect your association in the event of a claim.

An insurance audit will identify deficiencies and gaps in existing coverage and will determine if your association is under or over insured, thus enabling you to avoid paying for uninsured claims or over paying for coverage you do not need. Upon completion of this audit, we prepare a written summary of our findings and meet with the board to discuss those findings, make recommendations, and answer any questions.

In addition to the insurance audit, our office can also develop insurance guidelines that:

  • Delineate the procedure for submission of a claim by a homeowner or by the association; and
  • Clarify who is responsible for paying deductibles and how gaps in coverage or overlapping insurance provisions are handled.

4.  Be Alert for Irregularities

When auditors speak of irregularities, they generally mean the unauthorized use of association assets, primarily cash and investments, for purposes other than those related to the association’s welfare.  In the past, a number of associations have experienced irregularities in their operations, with negative financial results.  These occurred because of a breakdown in complying with the system of operating checks and balances available to associations.  An adequate check and balance procedure is one that, by design, acts to test the adequacy of another procedure.

While it is impossible to prevent all irregularities, a system of checks and balances, referred to as “internal controls,” adequately implemented, should disclose irregularities within a reasonable amount of time so the association can take timely action.  In fact, most associations should routinely have a good system of internal control because of the close involvement of the board of directors and the management personnel responsible for daily operations, supplemented by an annual audit by independent certified public accountants.  Regardless of size, every association can develop and implement some level of internal controls.

When internal controls break down, irregularities occur.  The primary responsibility for the safekeeping of the association’s assets is with the board of directors.  Although many governing documents provide for the use of property management companies to conduct the association’s day-to-day operations, the board cannot abdicate its responsibility.  The importance of the board in the association’s system of internal control is supported by our experience, which shows that when the board allows its involvement to decrease, the chance of irregularities occurring increases.

Irregularities arise for two primary reasons:  that is, to “borrow” funds temporarily with the intent of repaying the funds, or to “appropriate” funds without intent to repay.  All too often, however, the “borrowing” turns into appropriation because the person has no means of repaying the sum borrowed.  Not addressed here are situations where someone simply takes funds and disappears.  Rather, we’ll presume that the person doing the “borrowing” expects to remain part of the community.

While auditors are trained professionals to review and evaluate the strengths and weaknesses of the internal control systems, boards of directors are not so trained. However, certain warning signs can reveal that weaknesses exist.  Board members are advised to be aware of the following circumstances which could create irregularities:

  • Lack of or infrequent board involvement in overseeing activities;
  • Lack of board approval of contractual commitments;
  • Lack of board review of original invoices supporting major expenditures;
  • Write-off of delinquent owners’ accounts without board approval;
  • Lack of periodic (monthly, quarterly) financial statements for the board, including explanation of major variances from budget and prior year figures;
  • Exclusion of board members as signatory on investment accounts, thereby prohibiting the association ready access to its own funds;
  • Continual use of reserve cash and investments to fund operations;
  • Lack of periodic analysis of reserve investments;
  • Control of operating cash receipts and cash disbursements in one person;
  • Control of reserve cash and investments by one person;
  • Lack of dual signature on checks, especially for large non-recurring expenditures;
  • Rapid turnover and fluctuation in employees or temporary help (this could be an indication of fictitious personnel on the payroll, or “ghosts”; to check this, ascertain that the suspected fictitious employee is included in the payroll tax returns, W-2s and employment records – these conditions could exist for fictitious vendors as well); and
  • Billing for excessive or fictitious rendering of services, referred to as “padding.”

Many association board members believe it is solely the auditor’s role to uncover these weaknesses, and, certainly, the auditor should take these weaknesses into consideration when developing an audit program.  However, the auditor is usually involved just once a year.  It is far better to have and follow an adequate system of internal controls that may detect irregularities within a reasonable time after they occur, so the board and management can take timely action.

5.  Take Steps to Limit Premise Security

A premise security lawsuit is a claim for damages brought in a civil court on behalf of a crime victim, usually against the owner of the premises (e.g., association, hotel, apartment, etc.) where the crime occurred.  The victim of a crime seeks to hold the property owner responsible for the injuries sustained, contending that the crime was “caused” by the property owner’s failure to provide sufficient security to protect persons from criminal acts at the location. Premise security lawsuits are among the fastest growing segment of personal injury lawsuits.

Premise security lawsuits are also very expensive. The average settlement amount is over $500,000.

The average reported verdict for premise security lawsuits is:

  • Assault:                    $1 million
  • Rape:                       $1.8 million
  • Wrongful Death        $2.1 million

Suggestions for limiting liability:

  • Review your governing documents to determine if you have a duty to protect or provide security.  Some Declarations impose a duty to provide a “safe and secure environment”;
  • Keep well informed of changes in state and case law;
  • Establish and follow procedures for regular inspection of premises (e.g., lighting, locks, fences, cameras, etc.);
  • Consult with appropriate professionals prior to making modifications to lighting, fencing, cameras, etc;
  • Consult with your insurance carrier prior to taking any action with security implications (e.g., hiring armed guards).  Be careful not to unknowingly create a duty to protect or provide security;
  • If you implement some type of security measure, be certain you do so with reasonable care;
  • Promptly investigate and respond in writing to every resident’s request for protective measures, inquiry, or complaint about security;
  • Be aware of crime in your community, discuss it, and determine if there are reasonable and cost effective methods available to implement preventive measures;
  • Offer awareness and educational workshops for association residents (e.g., police department, private security companies, insurance agents, etc.);
  • Avoid use of the words “security,” “safety,” and “protection.” Avoid making representations or giving assurances about resident security or safety;
  • Notify residents promptly if you reduce the level of security for any reason; and
  • Be certain you have adequate insurance (liability and D & O) to cover claims for failure to protect owners and residents.

6.  Prudently Invest Association Funds

Every board is faced with the difficult task of raising money and managing association funds while trying to keep annual assessments low and special assessments to a minimum.  Developing an investment policy can assist the Board in meeting its maintenance duties without breaking the budget of the association and its members. A policy regarding the investment of reserve funds is required by Colorado law.  Such an investment policy should also be developed for a variety of other reasons, including:

  • It is far easier to earn money than it is to raise it. An incremental 3 to 4 percent of total return can, over time, make an enormous difference in the association’s financial health;
  • Income from investments can reduce the need for special assessments;
  • Many associations likely already have an informal investment policy.  However, large sums invested for long periods of time are better invested under a standard investment policy; and
  • A carefully developed investment policy discharges the fiduciary duty and helps protect board members from investment liability.


The Prudent Investor Rule is replacing the Prudent Man Rule. The Prudent Man Rule arose from an 1830 Massachusetts case, which stated that a trustee (a fiduciary):

…is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.

In practice, the Prudent Man Rule became narrow and restrictive. Some state statutes even specified the investments a fiduciary could make. Courts interpreted the Prudent Man Rule to mean the primary responsibility of board members was to never lose money.  In determining prudence, each investment would be judged independently, which meant board members could be held liable if there were losses in a portfolio that made money overall.

The Prudent Man Rule, as a result of the statutes and court interpretation, allowed fiduciaries to
invest almost solely in U.S. government bonds. But, high levels of inflation and the development of modern portfolio theory has led to the decline of the Prudent Man Rule and to the rise of the Prudent Investor Rule.

There are two statutory versions of the Prudent Investor Rule. Colorado has adopted both, which are known as the Uniform Management of Institutional Funds Act and the Uniform Prudent Investor Act, and may be found at Sections 15-1-1101 to 15-1-1109, 15-1.1-101 to 15-1.1-115 of the Colorado Revised Statutes. The Acts specifically refer to charitable organizations and to trusts.  However, the same concepts can be used to guide community association boards in their investment policies.


Standard of care is one of the concepts addressed in the Acts. Under both Acts, the measure of prudence is based on investment processes, rather than classifying an investment or course of action as prudent. A governing board is required to exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision. Hindsight is no longer a factor of the investment standard. The board is to consider the expected total return on its investments, instead of looking at each investment independently. In determining prudence, the association’s purpose for investing should be considered. Such purpose is typically to preserve and protect property values and maintain and repair common property.

A board can include riskier investments in its portfolios under the Prudent Investor Rule than it could under the Prudent Man Rule. However, the Prudent Investor Rule acknowledges the importance of protecting an investment portfolio from inflation by directing the board to consider both the long and short terms needs of the association as well as the price trends and general economic conditions.

In addition to the above guidance offered by the Prudent Investor Rule, the Board is bound by the standard of care as provided for in the Colorado Revised Nonprofit Corporation Act (C.R.S. §7-128-401).  Pursuant to that statute, the officers and members of the Board of Directors shall make investment decisions in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the Director or officer reasonably believes to be in the best interests of the Association.

A significant change between the Prudent Man Rule and the Prudent Investor Rule is the board can now delegate investment authority. Delegation may be to a committee, an officer, an employee, an independent investment advisor, investment counselor or manager, or bank or trust company. The ability to delegate helps the board fulfill its fiduciary duty to protect the assets of the community and provide for the maintenance of the community in the face of increasing complexity involved with modern investing.

The board must use reasonable care in selecting a delegee, directing the delegee, and reviewing the performance.  The board must also ensure that the person handling investments understands the association’s objectives in investing a given sum of money. As with any other type of delegation, the board remains ultimately responsible for the investments.  Each board member should monitor investment reports and ask questions if something is unclear.


The following is a list of factors every board should keep in mind when investing funds:

  • Total return is the full amount an investment earns.  Total return is calculated as the sum of dividends and interest plus capital gains less any capital losses and expenses;
  • Risk is the measurable possibility that an investment will lose value.  The risk can come from one particular stock, the market itself, or inflation;
  • The greater the inherent risk, the greater the reward, unless the risk is avoidable (i.e. undiversified investments);
  • Consider the amount of time the money will be invested and what the money will be used for when considering how much risk to take;
  • An investor can reduce risk by combining assets in a portfolio (a collection of assets) and get a better reward;
  • Diversification and asset allocation are the most important portfolio risk reduction techniques used today;
  • Diversification is spreading a portfolio’s investments among different assets for the express purpose of reducing specific risk.  Sector diversification will reduce risk associated with investing in several different companies in the same industry;
  • Investing in mutual funds is a common way for nonprofit organizations to diversify their stock holdings;
  • Asset allocation is the distribution of investments among different classes of assets, such as stocks, bonds, and cash, to reduce market risk;
  • Most people instinctively measure an investment’s performance on a short-term basis.  However, investments will generally increase over time even though there are dips along the way; and
  • Do not attempt to predict broad swings in the market.  Given enough time, investments as a whole will make money.

Our office recommends the following when investing:

  • Evaluation of the funds the association currently maintains and how they are invested.  Even money that remains idle for short periods of time may be able to be invested to maximize the association’s income.  Consider a money market account instead of a regular checking account;
  • Review of how reserve funds are invested. Investigate the possibility of re-investing those funds for a higher return;
  • Periodic consultation with a financial advisor. Most board members do not have such expertise and financial planning is complex.  Remember board members have a fiduciary duty to make informed decisions and with the best interests of the association in mind.  This duty may impose a requirement to consult someone with the appropriate financial planning expertise and knowledge; and
  • Establishment of a written investment policy, as required by Colorado law, that addresses all objectives, delegation, asset mix, ability and diversification, investment manager accountability, transactions, reporting requirements, and cash flow requirements.

7.  Protect Against Fraud and Embezzlement

To protect against fraud today, it is important for associations to maintain sufficient control over its funds and accounts, to notify the bank promptly if fraud is suspected, and to review bank statements in a timely manner.  The primary factors in reducing the association’s exposure to fraud or embezzlement are prevention and early detection.  The information below is intended to provide guidelines and procedures to help the association protect against loss from fraud or embezzlement.  Boards should also discuss their association’s specific needs with their accountant and/or auditor.

The first step in protecting against dishonesty with respect to the association’s funds is to separate responsibilities in order to maintain adequate checks and balances. Have one (or two) people execute the checks, but have others reconcile the bank statement.  If the same parties perform both functions, fraud can go undetected for quite a while.  The bank statement should be reconciled promptly – within two to three days, if possible.  Most banks will not accept responsibility for honoring a fraudulent check if there is a delay in reporting the fraud.  Finally, ensure there is adequate supervision of the records to reduce the risk of an unauthorized person gaining access.


  • Keep the reserve supply of blank checks in a secure, locked location;
  • Lock the working supply of blank checks in a secure place, separate from the reserve supply;
  • Store cancelled checks and bank statements in a secure location, as they may contain sensitive or private information;
  • When verifying issuance of a check, verify the check number, the date, the amount, and the payee;
  • Keep checks which have been issued, but not to be mailed immediately, in a secure location;
  • Never use a “rubber stamp” to sign checks and try to avoid authorized signatures which are illegible or easy to forge;
  • Notify the bank immediately when a board member is no longer authorized to sign checks or otherwise transact business on behalf of the association;
  • Periodically review bank signature cards and access codes to be aware of all current authorizations; and
  • Review check orders promptly to verify account information and report any missing checks to the bank and the printer immediately to place a stop payment order.


  • Do not make a check payable to your bank unless it is for an obligation to the bank.  These checks are too easy for an unauthorized person to cash;
  • Checks used to transfer money between accounts should be made payable to the name of the account into which they are deposited;
  • All checks should have two signers, preferably two board members, or one board member and the manager.


  • Are bank statements reconciled monthly?
  • Are the bank statements opened and reviewed by someone other than the bookkeeper?
  • Does someone other than the bookkeeper pick up statements held at the bank, if any?
  • Are the management company, its employees, and the bookkeeper bonded?
  • Does the association have fidelity insurance covering board members and the management company and the bookkeeper?
  • Is there adequate supervision at the place where the association’s banking records are kept?
  • Is the mail opened by someone other than the bookkeeper?
  • Is a daily listing of checks received by mail prepared by someone other than the bookkeeper?
  • Is cash deposited intact daily or at least kept locked until deposited?
  • Does your bank provide a receipt for deposits?
  • Are all disbursements made by pre-numbered checks?
  • Are petty cash disbursements evidenced by approved receipts?
  • Is the bookkeeper prohibited from signing checks?
  • Are signed checks mailed without being returned to the preparer?
  • Are signed checks mailed promptly?
  • Is the supply of unused checks controlled?
  • Is the signing of blank checks prohibited?
  • Are checks issued in number order?
  • Do you avoid issuing checks with a check number that was previously used?
  • Are voided checks retained and accounted for?
  • Do you avoid making checks payable to “cash”?
  • Are all invoices approved for payment and, when paid, cancelled or otherwise noted as having been paid?
  • Are invoices checked to make sure there are no unexplained past due notices?
  • Are supporting documents given to the check signers along with the check?


The 12-step program list on the first page of this article is a complete list of steps boards should take on behalf of the association in order to educate and protect themselves and the association.  Among this list are the key steps explained in this article which safeguard the association and aid the board in running a successful community association:  conducting a legal audit; maximizing indemnification provisions; verifying adequate insurance coverage; being alert for irregularities; taking steps to limit premise liability; prudently investing association funds; and protecting against fraud and embezzlement.

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