Davis-Stirling §5806: The California HOA Fidelity Bond, Sized and Placed

Davis-Stirling fidelity bond requirements come from California Civil Code §5806: a California association shall maintain crime and employee-dishonesty coverage of at least its combined reserves plus three months of total assessments, an equal amount of computer-fraud and funds-transfer-fraud coverage, and coverage for the managing agent who handles association funds. Self-insurance does not satisfy it.

One clarification before the numbers: this is an HOA crime and fidelity bond, the kind that pays when someone who handles the association's money steals it. A securities dealer's fidelity bond and a 401(k) plan's ERISA bond are different instruments and do not answer this question.

What §5806 requires, stated as a formula

Section 5806 is part of the Davis-Stirling Common Interest Development Act, added by Assembly Bill 2912 and effective January 1, 2019. California Civil Code §5806 says the association shall maintain crime and employee-dishonesty coverage for anyone who handles its funds, the same exposure an HOA crime and fidelity policy is built to answer. The limit floor is the association's combined reserves plus three months of total assessments, unless the governing documents require more. The statute then adds an equal amount of computer-fraud coverage and an equal amount of funds-transfer-fraud coverage. Most references stop at 'must include' those two agreements, but because they are part of the same fidelity-bond coverage, each carries at the same limit, and that equal-amount sizing is the piece boards miss.

The checklist below maps each clause of §5806 to what it mandates and the coverage line that satisfies it.

How to size the §5806 bond

To size the bond, start with two numbers the board already has on file. Pull the current fund balance from the reserve study, then take the annual budget's total-assessment line and divide it by four for the three-month figure. Add the two, and that sum is the floor §5806 sets. The step most boards skip is timing: reserves build through the year as assessments come in, so size to anticipated year-end reserves rather than the balance in the account on the day the quote is written. Boards that keep reserve funds in a separate account with dual signatures on withdrawals sometimes ask whether they can insure less; §5806 offers no controls discount, so the reserves-plus-three-months floor holds regardless of the bookkeeping.

The method runs in four steps:

1. Pull the reserve-study fund balance and the annual total-assessment line, then divide the assessment line by four to get three months of assessments.
2. Add the two figures. That sum is the §5806 floor, before any higher amount the governing documents name.
3. Size to anticipated year-end reserves, not today's balance, because the reserve fund grows across the policy year.
4. Confirm all three insuring agreements sit at equal limits, and that a rider or package policy is not silently missing one of them.

A standalone crime and fidelity policy usually places cleaner than a fidelity rider bolted onto the association's package policy, but the only way to know is to read the declarations for the limit and the three agreements rather than assume the package carries them.

A worked example: sizing a California association's bond

Take a 90-unit condominium association in the East Bay charging $400 a month and expecting its reserve fund to reach $520,000 by year-end. Three months of total assessments is 90 times $400 times three, or $108,000. Add the anticipated reserves and the §5806 floor lands at $628,000. The board sets the employee-dishonesty, computer-fraud, and funds-transfer-fraud agreements each at that figure, not the $108,000 three-month number a lender might accept on its own.

Size the bond to the anticipated year-end balance and the gap closes. A limit set to the three-month figure alone can sit a few hundred thousand dollars below the reserves it is supposed to protect, which is exactly the money a dishonest signer can reach. Boards read that shortfall as a paperwork technicality until a claim tests it, and by then the limit is fixed at the number on the declarations page.

Does the §5806 bond have to cover our management company?

Yes, when the managing agent handles association funds. Section 5806 requires the coverage to extend to the managing agent, and in practice that means the policy's "employee" definition has to reach the management company and its employees, not just the volunteer board. A management firm's own bond protects the firm, not your association, so confirm the endorsement in writing rather than assume the standard form reaches them.

A self-managed association is not exempt from any of this. The bond follows whoever touches the money, so a volunteer treasurer who writes reserve checks is precisely who §5806 has in mind. Whether the board hired a manager or keeps the books itself, the three insuring agreements and the reserves-plus-three-months floor apply the same way. The immunity a volunteer director carries under state law answers lawsuits, not a theft the association failed to insure.

The self-insurance trap and the lender overlay

Section 5806 closes the obvious workaround in a single line: 'Self-insurance does not meet the requirements of this section.' A large reserve cushion, however comfortable it feels, is not compliance. The association has to buy a policy, and a board that quietly decided to carry the risk itself has satisfied neither the statute nor a lender reviewing the project for a unit sale.

A second floor can sit on top of §5806. When units in the community carry warrantable financing, Fannie Mae's Selling Guide B7-4-02 expects fidelity coverage for projects over 20 units, generally at least three months of aggregate assessments, with the management agent covered; where §5806 and the Fannie overlay diverge, size to the greater of the two. Keep the fidelity bond separate from the board's liability coverage, though: a crime bond pays when money is stolen, while a lawsuit over a board decision falls to California's director-immunity and D&O protections, not fidelity.

California is one of a handful of states that writes the fidelity floor directly into statute. For how it compares with the rules in Florida, Virginia, and elsewhere, see our guide to HOA insurance requirements by state.

Sizing and placing your §5806 program

Coverwatch is a flat-fee California HOA insurance broker. We size and place the §5806 crime and fidelity program: all three insuring agreements at equal limits, sized to anticipated year-end reserves plus three months of assessments, with the managing agent written into the policy's "employee" definition. If your board wants the number checked against the statute and any lender overlay, start with our California HOA program.