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HOAS & CONDOS - SHOULD THEY HAVE FIDELITY BOND INSURANCE?

I get questions all the time about whether an HOA or a Condo Association must have fidelity bond insurance. The answer is: not unless the governing documents require it! There is no legal requirement in California that requires the boards to procure it. But it would be legally required if the Bylaws, the Articles of Incorporation, or the CC&Rs said it was required. Last time I checked, the rule of thumb was, I believe, 3 Xs the amount of money in the HOA or Condo Association reserves accounts, or maybe that was all accounts. I am not the one to determine that, talk to a provider to find out the standard in the industry.

The next question is, well, if the documents do not require it, why have it?

One reader sent me an email saying "The 2009 Condo Bluebook states this type of insurance is not required by law, but is required by some governing documents. It is advisable for large associations to obtain this type of insurance. Page 82 near the bottom."

The Bluebook is a good publication and hats off to my colleague Brandon Bickel for publishing it. I will say, however, that not all practitioners, boards, managers or even insurance providers necessarily agree on what should be. My feeling is that all HOAs and Condo Associations should protect their funds with fidelity bond coverage. And for proper protection, be sure to investigate how it works and who should or should not be on the bank signaturue cards for the protection purchased to be effective.

I think its a "no brainer". Boards should procure fidelity bond coverage to protect the association's assets.

There is more risk in today's world than ever before of theft. The economy is in a bad way (one might say it s _ _ ks if one were not an attorney writing for a wide audience). And HOAs and Condo Associations are managed by volunteer board members - who tend to have the following problems (I think its safe to say):

In more cases than not, Boards are without the assistance of a professional manager or any other professional or knowledgeable help.

More often than not, Board Members lack specific expertise that would help them identify inconsistencies in the financials.

More often than not, Board Members do not even have time to review the financials regularly.

Sometimes, hopefully not often, Board Members serve with bad motives or without a conscience. And

Sometimes, people do things out of desperation they would not do under different circumstances.

And today, when people are desperate for money, where will the bad people turn? To a pile of money that is not being watched over carefully enough.

There have been a number of instances where Board members or managers have absconded with HOA or Condo Association funds. Sometimes its even been the "soccer mom" who always brought cookies to the board meetings - the person you would least likely suspect of having the capability to pilfer funds belonging to others.

And like the matter of wondering whether to make the swimming pool safe (triggered by the Virginia Graeme Baker Pool Act), it only takes one bad incident to bankrupt an association.

I know HOAs and Condo Associations are very pressed for funds these days, but the problem would be much worse if there were no funds at all.

Full post as published by California Condo & HOA Law on March 19, 2009 (boomark / email).