What is a fidelity bond? This is a question many board members ask when reviewing their insurance policies. A fidelity bond plays a critical role in protecting an association’s finances. Without it, communities may fall into financial insecurity and be forced to turn to large special assessments, sudden spikes in dues, or high-interest loans.
What is a Fidelity Bond?
Homeowners associations are responsible for maintaining financial stability. A big part of this is obtaining adequate insurance coverage, including a fidelity bond. What are HOA fidelity bonds?
Simply put, a fidelity bond is a type of policy that protects the HOA’s funds against financial crimes, such as theft, forgery, and even computer fraud. It covers board members, employees, and community managers, among others. Similar terms for a fidelity bond include crime insurance and employee dishonesty bond.
What Does a Fidelity Bond Cover?
In a planned development, HOA fidelity bonds help shield the association from financial losses caused by dishonest individuals. These people might steal from the HOA or commit fraud to gain financially.
While exact coverage can vary depending on the policy, a fidelity bond generally covers the following:
1. Forgery
Forgery refers to the unlawful modification of a document. In an HOA or condo association, the most commonly forged documents include contracts, invoices, and checks. For example, if a board member creates a fake invoice to secure payment for a non-existent vendor, fidelity insurance can cover the loss.
2. Theft
It is not unheard of for a board member or HOA manager to steal money from the association. The theft can even occur as part of a conspiracy, with two or more people scheming together.
When this happens, the HOA’s fidelity insurance can step in to cover the loss. That said, it is worth noting that this policy doesn’t typically cover robbery at the hands of unaffiliated third parties.
3. Computer Fraud
Theft isn’t always physical. In the digital age, it has become easier to transfer funds electronically, and therein lies the danger. If a board member, manager, or employee transfers money from the association’s bank account without authorization, fidelity insurance can come in handy.
4. Loss of In-Transit Funds
This occurs when physical cash or electronic funds go missing during transfer between locations or while being cleared between accounts. It can involve physical theft, where someone steals the money during transport. Additionally, it can also involve an electronic transfer that’s been trapped or rerouted.
5. Abuse of Credit or Debit Cards
Many communities maintain credit or debit cards in the association’s name. Board members or HOA managers use these cards to pay for association-related expenses, such as office supplies and maintenance needs.
Sometimes, a person will swipe the card for their personal use. They buy groceries, pay car insurance, or purchase things unrelated to the association. Fidelity Insurance can cover the funds used for these purchases.
While they may promise to reimburse the HOA later, this type of action is considered dishonest. Allowing it to continue can only blur the lines and introduce liabilities to the association.
Understanding HOA Fidelity Bond Requirements
The requirements for a fidelity bond depend on state laws and the association’s governing documents. Board members should consult a legal professional or their HOA management company for guidance.
Does Virginia Require an HOA Fidelity Bond?
Yes. According to Section 55.1-1827 (for HOAs) and Section 55.1-1963 (for condos), associations are required to obtain a fidelity bond with a $10,000 minimum coverage. The required coverage is the lesser of $1 million or the association’s reserve balances plus one-fourth of its aggregate annual assessment income.
Does Maryland Require an HOA Fidelity Bond?
Yes. According to Section 11B-111.6 (for HOAs) and Section 11-114.1 (for condos), associations are required to obtain a fidelity bond. The required amount is the greater of (the lesser of three months’ worth of gross annual HOA fees and the total amount held in investment accounts when the insurance is issued) and $3 million. That said, there are exceptions for small HOAs and condominiums.
Does DC Require an HOA Fidelity Bond?
While condominiums in DC are required to maintain certain types of insurance (Section 42–1903.10), a fidelity bond is not among them. Furthermore, there is no equivalent statute governing HOAs in the District of Columbia. For fidelity bond requirements, associations must refer to their CC&Rs and bylaws.
The Importance of HOA Fidelity Bonds
An HOA fidelity bond serves a critical purpose in the long-term stability of an association’s finances. Even if state laws or the governing documents don’t require it, board members would do well to obtain a comprehensive policy.
Associations are no strangers to money. From HOA dues and special assessments to monetary fines and rental fees, revenue comes steadily. Fidelity insurance helps protect those funds, ensuring the association has a safety net in case they are lost due to theft, fraud, or unauthorized transfers.
Without adequate fidelity coverage, associations would have no way of recovering stolen funds. They would have to rely on the homeowners, yet again, to meet the association’s operational and reserve needs. This means increasing dues (by a lot) or levying special assessments.
Who Does an HOA Fidelity Bond Cover?
In general, a fidelity bond covers those who handle association funds or property. This usually includes board members, officers, employees, managers, management staff, and volunteers. It can even extend to past or future directors.
Of course, fidelity insurance doesn’t cover bad performance. If an HOA suffers due to poor board decisions, this policy can’t be held responsible for the financial losses. If an association’s budget can’t cover a large project and the board still decides to push it through, that’s an example of poor management.
Additionally, fidelity insurance typically does not cover third-party crimes. If an outside individual steals from the HOA, the association will likely need a separate policy. That said, it ultimately depends on the type of policy, as some may allow for such coverage.
How Much Fidelity Bond Coverage is Necessary?
To determine how much fidelity bond coverage is necessary, the HOA board must review state laws and the governing documents.
For Virginia, the required coverage is the lesser of $1 million or the association’s reserve balances plus one-fourth of its aggregate annual assessment income.
For Maryland, the required amount is the greater of (the lesser of three months’ worth of gross annual HOA fees plus the total amount held in investment accounts when the insurance is issued) and $3 million.
The U.S. Department of Housing and Urban Development (HUD) also requires associations to maintain a fidelity bond that meets FHA standards. This coverage should include:
- An amount equivalent to at least three months of association dues and assessments,
- The association’s reserve funds, and
- Employees, volunteers, board members, and management personnel who handle or have access to association finances.
Fannie Mae-backed loans also have additional fidelity coverage requirements, including:
- Coverage equal to three months of scheduled maintenance assessments, and
- A deductible of no more than $25,000.
What is the Cost of HOA Fidelity Bonds?
Premium prices can vary depending on the community’s size, revenue, and extent of coverage. Small- to medium-sized communities can expect to pay a few hundred dollars annually, whereas large communities can face annual premiums in the thousands.
Additionally, higher coverage limits tend to require higher rates. If the policy covers millions of dollars, the HOA board should expect to pay an annual premium of about 0.5% to 1% of the total coverage amount.
What is a Fidelity Bond? Answered!
Fidelity insurance protects the association against financial loss resulting from fraud, theft, and similar crimes. It covers board members, community managers, volunteers, and employees. Virginia and Maryland law both require this type of policy, but even without a requirement, it is wise to obtain one anyway.
National Realty Partners is a leading provider of HOA management services in Virginia, Maryland, and Washington, DC. We can help your board with rule enforcement. Call us today at 703-435-3800 or request a proposal online!
RELATED ARTICLES:
- What Is Vendor Insurance And Do HOAs Need It?
- How Does The Freddie Mac And Fannie Mae Update Affect COAs
- Can The HOA Earn Profits From Dues And Other Income Sources?