Going through your association’s paperwork you may have found reference to Fidelity Bond. Or maybe it was Crime coverage? Or Fidelity Insurance or Employee Dishonesty…….. Geesh! Is it so complicated that they have to give it all of these different names?

Don’t let the nomenclature get you down. This coverage is in place to make the association whole again if someone decided that Jamaica looks lovely this time of year and the reserve account has just enough money in it to fund the trip. As we all know, maintaining an association without reserve funds is practically impossible. This coverage helps prevent a rather dramatic assessment to the members if that kind of theft were to occur.

The age-old question is: how much should we be insured for? When it comes to insuring physical property like a building, a building cost estimator is used, and it makes practical sense- you insure the building for how much it would cost in that city at that time to rebuild the structure. (We don’t bother with real estate market value, because the damaged structure is insured, not the location.) It is a number that is directly linked to the item it is insuring.

Fidelity/Crime/Employee Dishonesty insurance is also directly linked to what it is insuring. It is designed to replace money that is lost due to a dishonest act, so the money becomes the direct link – the “property” that needs insuring. But how to calculate the amount to insure requires that you refer to your governing documents. In an association’s CC&R, the insurance section often includes a formula for what is required to be covered under the Fidelity coverage. If, however, your documents are silent, we need to turn to the Federal Government regulations. Most government lending institutions require that associations with over 20 units carry Fidelity insurance. While FNMA (Fannie Mae) requires that an association carry AT LEAST three months worth of assessments in their fidelity coverage, the FHA (now backing an estimated 30% of loans) has the higher requirement of three months of aggregate assessments for all units PLUS reserves. Between the governing documents and the Federal Government regulations, be sure you meet the HIGHER requirement.

If you think about it, it makes sense: you want to be able to replace the reserves if they’re stolen. Also, sometimes it takes a few months for the treasurer to notice that something is wrong, so insuring three months worth of assessments is a good idea, too.

After determining how much you will need to insure, you will want to make sure the appropriate people are covered under the policy. Most policies will include board members automatically, but some will not. With an “employee dishonesty” policy, some carriers do not consider unpaid board members to be “employees.” Make sure that the definition of the insured includes your board members.

And what about the manager of the association? If they aren’t paid directly by the association, they may be considered to be contractors and not employees. Make sure that the language of the policy is expanded to include the managing agent for the association. This takes an adjustment of the actual policy language, so getting confirmation of that expansion in writing from your broker or agent is an excellent way to be sure that it has been done.

There are many safeguards that can be put in place to help reduce the possibility of a board member or manager stealing money from the association. Here are a few suggestions:

• Require the signature of two board member on checks withdrawing money from the reserve accounts
• Make sure checks are signed manually (not rubber-stamped)
• Confirm supporting documentation for payment (invoices, etc.
• Keep investments in the association’s name (not individual board members)
• Prohibit the writing of checks to “cash”

Also keep an eye out for checks that seem out of place. Perhaps payable to a contractor you have never seen performing work on the association. One of the more popular fraud tactics of late has been making payments to a company that doesn’t exist (for work that didn’t happen).

While these suggestions are an excellent way of making it more difficult for a board member or manager to take money from the association, it does not deter them entirely. For example, take the two-signature requirement for removal of money from the reserves. It is good that at least two people are informed that money is being removed from the reserve account, but if someone is willing to steal money from the association, it’s a good bet they are also willing to forge a signature to achieve that end.

So, knowing that we live in a world where 80% of money stolen from a company is stolen by an employee, it doesn’t matter what it is called – having a Fidelity/Crime/Employee Dishonesty policy in place is an important part of protecting your association from loss.

Kimberly Lilley is the Director of Marketing for Berg Insurance Agency