Fidelity insurance protects the association in the event someone associated with the association takes the association’s money and runs.  Typically, fidelity insurance will provide coverage in cases of employee theft, theft of money and securities while on premises or in transit, forgery, fund transfer fraud, computer fraud, money order and counterfeit currency fraud, credit card fraud, as well as coverage for the cost incurred to investigate a loss.

Coverage for these types of crimes comes in two general forms, a fidelity bond or a fidelity insurance policy.  A bond is a contract between the bonding company and two other parties, such as an association and a manager or director.  In a bonding scenario, the bonding company will guarantee the honesty of the individual and if there is a loss, the bonding company will reimburse the association and then pursue the criminal for recovery of the stolen funds.  The more popular and generally more cost effective coverage is a fidelity insurance policy.  A fidelity insurance policy is between the insurance provider and the association.  If the association experiences a loss by theft, for example, by a board member, association volunteer or employee, it will file a claim with the insurer.  The insurer will then investigate and provide coverage for the loss subject to the specific terms of the policy.

Obtaining fidelity insurance has always been a wise business decision, but it has recently been made mandatory for all associations over 20 units that wish to receive FHA certification.  This requirement mandates coverage for all association directors, employees, and all other association members who handle the funds of the association in the amount of three months of assessments plus everything in the reserve account.  If the association employs a management company, the association is required to ensure that the management company also has its own fidelity insurance that provides coverage for all employees, officers, and agents who are responsible for management of the funds of the association.  The FHA fidelity insurance requirement is set forth in Mortgagee Letter 2012-18.  In addition to the above, the Colorado Common Interest Ownership Act (CCIOA) requires post-CCIOA communities to carry their own fidelity insurance policy equal to two months of assessments plus everything in reserves.

Fidelity coverage maintained by a management company is a different type of coverage and will not suffice to provide coverage to an association in the event of a loss because the management company’s insurance protects the management company from its losses and not the association’s losses.

One of the 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 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 because of the filing of the lawsuit would have to be paid by the association until a settlement was reached or judgment obtained.  If the association had its own fidelity coverage, however, and followed the FHA requirements, it would name the management company as a Designated Agent by endorsement on its (the association’s) fidelity insurance.  The association’s fidelity insurer would pay for the theft by the management company personnel and then would subrogate against the management company’s fidelity insurance.  One thing to be aware of is that the fidelity insurance limit for the Designated Agent may be at a lesser limit than the association’s limit.    On the up-side, fidelity insurance can insure for theft by means of electronic transactions, by stolen credit cards and other causes of loss.

Therefore, it is in the best interests for associations to obtain fidelity insurance, regardless of any coverage that may be offered by their management companies.  Should you have any questions about fidelity coverage, please contact one of our attorneys at 303.432.9999.

We would like to thank Clifford Treese for his input on this article.

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