In 2020, a bill helping to define what financial protections for associations look like came into being (AB 2912). As with every good intention, some difficulties in execution arose. You’re required to deposit funds into a bank, savings association, or credit union as long as the funds are covered by insurance provided by the federal government. But wait, credit unions have a different insuring entity than the FDIC. Now what?

Well, clearly the intention was to encourage boards of community associations in California to protect their associations’ assets, since they become fiduciaries when they are responsible for other peoples’ money. It was simple enough to fix the problem above by including the range of insuring entities that might help keep that money secure in this cleanup bill.

The 2020 law also prohibited transfers of greater than $10,000 or 5% of an association’s total combined reserve and operating account deposits, whichever is lower, without written approval from the board. OK, we certainly don’t want the board to be unaware of the transfer of large sums of money. But, again, a somewhat technical problem became apparent: “5% of the association’s total combined reserve and operating account deposits” – exactly WHEN? At the time of budgeting? At the time we are making the transfer? And it also turned out that one size really didn’t fit all when it came to the numbers.

To fix those problems, the language was changed to, “the lesser of five thousand dollars $5,000 or 5% of the estimated income in the annual operating budget, for associations with 50 or less separate interests, or the lesser of $10,000 or 5% of the estimated income in the annual operating budget, for associations with 51 or more separate interests.” Not only do we have different numbers for different sizes of associations, but we also know to look to the numbers contained in the annual operating budget in order to do our calculations.

Existing law already prohibits the managing agent from commingling the funds of the association with the managing agent’s own money or with the money of others, but there were some exceptions that would excuse the managing agent from following this law, such as if the payments were deposited within 24 hours and remained co-mingled for less than 10 days, the deposits happened before February 26, 1990 and the managing agent had a written agreement with the board stating that they (the managing agent) would provide fidelity coverage for the money themselves.

Those exceptions went away. Just don’t mix the money. Thanks!

And, last but certainly not least, last year’s bill required the association to maintain “fidelity bond” coverage (including computer fraud and funds transfer fraud). No one was shocked by that, as the Federal lending guidelines have been asking for that for years. The confusion was the name. “Fidelity Bond” is a somewhat old-fashioned, and not completely accurate, way of describing how to protect an association’s funds if someone who has access goes in there and swipes them. This bill did a better job of letting us know that “fidelity bond,” by any other name, smells as sweet (and works just as well):
“crime insurance, employee dishonesty coverage, fidelity bond coverage, or their equivalent.”

So, that’s it…When things got better for the financial safety of communities in California, some things got more confusing. AB 1101 was written to clear things up.

Kimberly Lilley is the Director of Business Development for Berg Insurance Agency and can be reached at kimberly@berginsurance.com.