Many community associations are required by their declarations to carry “fidelity insurance,” but what exactly is fidelity insurance? What does it cover and, perhaps more importantly, what doesn’t it cover? In order to fully protect an association, it is important to understand the limitations and exceptions of an association’s fidelity insurance.
In simple terms, fidelity insurance protects an association from employee theft. Policies vary but the following provisions can be problematic for associations and should be considered carefully:
The theft must be committed by an employee. The most common limitation of fidelity insurance is the fact that most fidelity insurance policies only cover theft of funds committed by “employees”. Typically the definition of “employee” includes requirements that an individual person be (1) compensated directly by salary, wages or commission and (2) be directed and controlled in the performance of their services. Non-salaried board members, volunteers and association managers do not meet this definition. Therefore, in order to protect an association from theft by those with access to assets but not technically “employees”, an association needs to purchase an endorsement which expands the definition of “employee” to include directors, officers, management company agents, and if possible, committee members.
Coverage may also be denied if the employee (or other specifically covered individual) who commits the theft caused fidelity coverage to be canceled at a prior job. The idea is that the insurance company is not going to insure the association against such a high-risk employee. Under the same logic, if a covered individual steals from the association, sets up a repayment plan, and steals again, there will not be coverage for the second theft.
The loss must be caused by theft. Most policies only cover losses caused by theft. In order to qualify as theft, the covered individual must commit an act with the intent to cause a loss to the association and a benefit to some known person. Coverage would not be provided for a loss of funds that are proven to be caused by an employee but where the funds were simply “lost” without the requisite intent. What steps the association must take to demonstrate that funds were stolen rather than merely lost, vary by policy. For example, some policies won’t pay unless a conviction is obtained. Since most “white collar” crimes are plea bargained a conviction for theft may be difficult to obtain.
A covered asset must be stolen. It is important to be aware that some fidelity policies only cover theft of particular sorts of assets. They may only cover theft of money, but not property, stock certificates or other assets. Depending on the business practices of the particular association, a cash only limitation may make the policy essentially useless.
As with all insurance policies, it is important to understand the limitations and exclusions of your fidelity policy in order to adequately protect the association. An insurance audit, which includes a thorough review of all your associations’ policies and endorsements, can save the association a significant amount of money in the long run. You may contact any of our attorneys for more information on insurance audits.