The American Heritage Dictionary defines “fidelity” as “faithfulness to obligations, duties, or observances,” but what does fidelity mean to your association and why do you need fidelity insurance? Every association collecting assessments has one or more persons handling the financial obligations of the Association (collecting and depositing assessments and paying invoices). Every board member, management company employee or other individual handling an association’s funds has a fiduciary responsibility to handle those funds in a way that best benefits the association, but what if they don’t?
Several years ago the Virginia General Assembly recognized the need to protect associations from those who do not act in the association’s best interest by enacting statutes to require associations and anyone handling an association’s funds to maintain fidelity coverage. Section 55-79.81 of the Virginia Condominium Act and Section 55-514.2 of the Virginia Property Owners Association Act (POAA) require that all associations collecting assessments for common expenses maintain fidelity or employee dishonesty insurance in the amount of $1,000,000 OR an amount equal to one-fourth (3 months) of total annual assessments plus the balance of all reserves (operating and replacement), whichever is less. For example, if an association’s total annual assessment income is $100,000 and there is $50,000 in replacement reserves and $10,000 in operating reserves, then that association is required to maintain fidelity insurance in the amount of $85,000 ($25,000 + $50,000 + $10,000).
Fannie Mae and FHA also require that associations and management companies maintain the above levels of fidelity insurance in order for owners and purchasers of condominium units to be eligible for Fannie Mae and FHA loans. The one difference in coverage requirements between Fannie Mae/FHA and Virginia statutes is that these lending agencies do not have a maximum cap of $1,000,000 and if the formula provided above comes out to more than $1,000,000 then Fannie Mae and FHA will require the higher amount.
The Common Interest Community Manager Regulations also require that association management companies maintain fidelity or employee dishonesty insurance in the amount of $2,000,000 or an amount equal to the total of all operating and reserve balances for all associations managed by that company, whichever is less. All associations should require that their management company provide proof of this coverage on an annual basis. The Common Interest Community (CIC) Board only requires evidence of a manager’s fidelity coverage every two (2) years when they apply for license renewal.
Because management companies, in most cases, collect assessments and pay invoices for the associations they manage, Roy Beskin of Beskin-Divers Insurance Group recommends that associations not only make sure that the association manager/management company is covered under the association’s fidelity coverage, but also to make sure the association is an additional insured under the manager’s/management company’s fidelity policy. The same rule applies if your association or management company is using another service company to manage your association’s finances.
Because the required amount of fidelity coverage is based on an ever evolving equation, we recommend that boards evaluate their fidelity coverage at least annually to insure that their association is in compliance with the coverage amounts required by statute as well as Fannie Mae and FHA.