HOA fidelity bond insurance

The amount is set by formula, not by judgment. Fannie Mae, Freddie Mac, and FHA all require fidelity or crime coverage at least equal to three months of aggregate assessments on all units plus the association's full reserve balance, for projects over 20 units. Several states impose their own floor, and you carry whichever is higher. California's Davis-Stirling Act requires the combined reserves plus three months of assessments, while Florida requires the maximum funds in the association's custody at any one time. Because reserves grow with every contribution, a limit set years ago is usually below the current standard, so the bond should be recalculated at each renewal against the reserve study and the assessment budget.

Only if the bond is endorsed to reach it, or the association is a named insured on the manager's own crime policy. This is the coverage boards most often lack. When an outside management company collects assessments and pays vendors from association accounts, a diversion by the managing agent or its employees is a real exposure, and a bond written only for the association's own directors and employees will not respond. Fannie Mae requires the manager to be covered where it handles funds, and California's Davis-Stirling Act specifically requires the association's bond to be endorsed for dishonest acts by the managing agent and its employees. Confirm the managing-agent endorsement is in place, or collect proof the association is named on the manager's policy, before relying on it.

They answer opposite problems. A fidelity bond, also called crime coverage, reimburses the association when someone steals its money, whether a treasurer embezzles reserves, an employee skims assessments, or the management company diverts funds. Directors and officers insurance defends the board when it is sued for a governance decision, such as enforcing a covenant selectively, rejecting a unit sale, or mismanaging the association. Crime is about theft and pays the association back; D&O is about judgment and pays to defend and settle a lawsuit against the directors. A claim that a board member stole reserves lands on the bond alone, and a claim that the board decided something wrongly lands on D&O. Most associations carry both, because one does not fill in for the other.

Yes, for projects over 20 units. Fannie Mae's Selling Guide B7-4-02 and Freddie Mac's Guide Section 4703.5 both require fidelity or crime coverage at least equal to three months of aggregate assessments plus the reserve balance before a lender can sell a unit loan to them. Falling below the standard makes the units non-warrantable, which blocks most conforming mortgages and depresses resale values in the building. The requirement is waived for projects of 20 units or fewer, and where the coverage needed would be $5,000 or less. Where a management company handles the funds, the bond also has to cover the manager, and where the project lacks documented financial controls, the required amount rises to the maximum funds in custody at any one time rather than the three-month figure.

It reimburses the association for money and securities stolen from its accounts by a covered person. That includes embezzlement by a board treasurer, skimming or fraudulent payments by an employee, and diversion of funds by the management company where the bond is endorsed to reach it. Modern bonds add computer fraud and funds-transfer fraud for money moved electronically without authorization, and a social-engineering endorsement for a wire sent voluntarily to a fraudster posing as a vendor. Forgery or alteration of association checks is also covered. What the bond does not pay for is a board's wrongful decision, damage to the buildings, injury to a resident, or an unexplained shortfall the association cannot tie to a specific, provable act of theft. It is theft coverage, and it requires proof that a dishonest act caused the loss.

Yes, and it usually needs a larger one relative to its size. A self-managed association holds its own operating and reserve accounts, so a volunteer treasurer often has direct and sometimes sole access to the money, which concentrates the theft exposure on one person. Without a professional management company's built-in controls, carriers look closely at whether the board maintains separate reserve and operating accounts, requires two signatures on reserve checks, and has bank statements sent directly to the board rather than routed through the treasurer. Weak controls can push the required bond from the three-months-plus-reserves figure toward the maximum funds held, and raise both the deductible and the premium. Tightening those controls is the fastest way for a self-managed board to lower its bond cost.