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Fidelity Bond Covers Theft of Association Funds

Posted in Reader Q&A

Question: I am a real estate agent. One of the questions that seems to come up all of the time these days, especially from the mortgage lenders, is whether the association has adequate “fidelity bond” coverage. Can you explain what this means and what the legal requirements are? A.T. (via e-mail) Answer: Fidelity bonding is basically an insurance policy that provides protection against theft of association funds.  It is sometimes also referred to as employee dishonesty coverage or crime coverage. As far as the legal requirements, Section 718.111(11)(h) of the Florida Condominium Act requires fidelity bonding covering the officers of the association, and any other person who has the authority to control or disburse the funds of the association. The minimum amount of required bond is the maximum amount of funds that could ever be stolen from the association. Therefore, the association must take fluctuations in its cash position into account when purchasing coverage. Also, provision must be made for large spikes in the association’s account balances, such as when a special assessment has been levied, or an insurance settlement received. Curiously, the Florida Homeowners’ Association Act does not impose fidelity bonding requirements, and in fact generally avoids insurance issues altogether. In my opinion, and setting aside any obligations placed on the association through its bylaws, it is the fiduciary duty of the HOA board to ensure that fidelity bonding is in place. The standards set forth in the condominium statute in terms of required coverage provide a good yardstick for homeowners’ associations as well. Although I have no hard statistics to point to, it is my observation that there seems to be an uptick in theft against associations, perhaps due to the economy. I know from personal experience that these incidents are often devastating to an association. Not only is there the legal wrangling that always follows, the sense of betrayal when a trusted person violates that trust does not spare associations. There are several important risk management considerations for boards that should be discussed with the association’s insurance and legal advisors. The potential problem areas where you might face potential denial of coverage after a theft loss are many. Some can be protected against easily, some not so easily. Amongst the most troublesome issues is when the source of theft is an employee of a management company who is not generally authorized to control or disburse funds of an association, but figures out how to steal their money anyway. In cases like this, I have seen the association’s insurer resists coverage on the basis that the person who stole the money is not covered by the association’s bond. The management company’s bonding company may also claim that they only insure the funds of the management company, not third parties. Examples of other areas where coverage problems are sometimes encountered include when a third party is the guilty party (for example, a contractor runs off with your deposit), claims of misrepresentation in the bond application process, and computer theft or fraud.