What Is an HOA Fidelity Bond?

The basic purpose

Community associations collect assessments, pay vendors, and often hold reserves intended for future projects. Fidelity coverage is designed to protect the association against certain financial losses caused by dishonest conduct by people described in the contract.

The product may be called a fidelity bond, employee-dishonesty coverage, or part of a commercial-crime policy. Those names can overlap in ordinary conversation, but they are not a substitute for reading the insuring agreement, definitions, exclusions, and endorsements.

What fidelity coverage is not

Fidelity coverage is not the same as directors and officers liability, general liability, property insurance, or a bank account's fraud controls. Each addresses a different category of risk, and an association may need several forms of protection.

It also should not be treated as permission to relax internal controls. Dual approvals, restricted account access, independent bank-statement review, and timely reconciliation can reduce opportunity and help the association document what occurred.

• Directors and officers coverage generally concerns specified management-liability claims, not missing association money.
• Cyber coverage may address certain digital events, while computer fraud and funds-transfer fraud depend on express wording.
• A surety-style form and a crime-insurance form may assign rights and duties differently.

People and money that may matter

Boards should identify everyone who can direct, receive, transfer, approve, or reconcile association funds. Depending on governing law and contract terms, relevant people may include directors, officers, employees, volunteers, managing agents, and management-company employees.

The money inventory should extend beyond the operating checking account. Reserve accounts, certificates or investment accounts, payment-platform balances, and funds held by a manager may affect the association's exposure or a statutory formula.

How a board can review the coverage

Start with the applicable state rule, then compare the declaration, bylaws, lender or secondary-market requirements, management agreement, and current coverage. A statutory minimum, where one applies, may not be the highest applicable requirement.

Review the named insured, covered-person definitions, loss triggers, limits, deductibles, discovery or loss-sustained terms, cancellation provisions, and endorsements with your insurance professional. Ask counsel to clarify legal obligations that are unclear.