NpS (Pennsylvania)
Posts: 4,216
Posts: 4,216
Posted:
We recently updated our Fidelity Insurance. Thought the following info might be helpful.
Fidelity Insurance insures HOA funds against embezzlement, misappropriation, etc.
We have been with the same insurance company and agent for at least a decade. To my knowledge, he never approached us to discuss the adequacy of our Fidelity Insurance.
The starting point was our 25-year-old organizing docs which required Fidelity Insurance at 1.5 times our budget, including reserves. Doesn't make much sense today because insurance should be tied to funds invested more so than funds collected and spent. So the first thing we had to do was amend our by-laws. Our new bylaws now require Fidelity Insurance at:
- at least 100% of reserves plus at least 3 months operating expenses for Directors, Officers, & Employees; and
- at least 3 months operating expenses for CM owner & employees.
100% of reserves plus 3 months operating expenses satisfies FHA, FNMA, and other federal agency lending guidelines. In today's market, it's important to make sure that such financing is accessible to HOs and buyers.
Next, we learned that:
- we only had $50k of Fidelity Insurance and it did not cover misappropriation by our CM; and
- our CM's Fidelity insurance of $1M was to cover all 30 of their association clients. If a CM employee stole a mere $50k from each client, there was going to be a shortfall of $500k. Also, we were only secondarily insured under the CM's insurance. We were exposed to the complex rules of coverage when two insurance companies go to battle over scope of coverage and which one pays.
We projected our Fidelity Insurance needs at $250k, got a quote, and sent in the premium. But as it turns out, $250k is a magic cut-off number. At $250k and above, our insurance company required personal guarantees from each of our Officers. We decided not to sign for two reasons: 1. We weren't going to go to the expense of investigating the impact on our other personal obligations; and 2. We thought such a requirement would have a chilling effect on anyone contemplating becoming a Board member, which is always an issue. Instead, we reduced the policy to $245k. It took more than 2 months just to get the coverage reduced by $5k.
Prior to buying the new Fidelity Insurance policy, our CM managed all of our bank accounts. We could have purchased Fidelity Insurance that included our CM, but the cost would have been exorbitant. Instead, we moved all of our reserve funds to a separate bank. We also moved all of our operating funds in excess of 3 month of anticipated needs. Only members of the Board have access to these accounts. We require 2 signers on all checks. Our Treasurer, who is not a signer, holds the physical checks. So there would have to be collusion between 3 Board members before any theft takes place.
We also had a lengthy debate with our insurance company about who constitutes an Employee. Although we don't have actual employees, we wanted to know if misappropriation by a Committee member volunteer would be covered. The conversation became quite convoluted, and we finally decided to adopt the 3 person rule described above. But for those of you who have individuals with access to HOA funds, you should dig deep into the details of any insurance rider that your insurance company offers.
It may sound like we are negative about our insurance company. Not so. The problem we encountered is that the more specific our questions got, the less we were able to rely on our local agent for reliable responses. And the more we talked with insurance company specialists, the less we were able to discuss our broader needs. We went through a maze of people that we believe we would have encountered with any insurer.
One of the side benefits of going through this process is that we are now signers on the bank accounts that our CM is managing for us. The last 2 times that we changed CMs, we were held hostage for our own money. That can't happen again.
Apologize for the long post. Hope it is helpful to some of you.
Fidelity Insurance insures HOA funds against embezzlement, misappropriation, etc.
We have been with the same insurance company and agent for at least a decade. To my knowledge, he never approached us to discuss the adequacy of our Fidelity Insurance.
The starting point was our 25-year-old organizing docs which required Fidelity Insurance at 1.5 times our budget, including reserves. Doesn't make much sense today because insurance should be tied to funds invested more so than funds collected and spent. So the first thing we had to do was amend our by-laws. Our new bylaws now require Fidelity Insurance at:
- at least 100% of reserves plus at least 3 months operating expenses for Directors, Officers, & Employees; and
- at least 3 months operating expenses for CM owner & employees.
100% of reserves plus 3 months operating expenses satisfies FHA, FNMA, and other federal agency lending guidelines. In today's market, it's important to make sure that such financing is accessible to HOs and buyers.
Next, we learned that:
- we only had $50k of Fidelity Insurance and it did not cover misappropriation by our CM; and
- our CM's Fidelity insurance of $1M was to cover all 30 of their association clients. If a CM employee stole a mere $50k from each client, there was going to be a shortfall of $500k. Also, we were only secondarily insured under the CM's insurance. We were exposed to the complex rules of coverage when two insurance companies go to battle over scope of coverage and which one pays.
We projected our Fidelity Insurance needs at $250k, got a quote, and sent in the premium. But as it turns out, $250k is a magic cut-off number. At $250k and above, our insurance company required personal guarantees from each of our Officers. We decided not to sign for two reasons: 1. We weren't going to go to the expense of investigating the impact on our other personal obligations; and 2. We thought such a requirement would have a chilling effect on anyone contemplating becoming a Board member, which is always an issue. Instead, we reduced the policy to $245k. It took more than 2 months just to get the coverage reduced by $5k.
Prior to buying the new Fidelity Insurance policy, our CM managed all of our bank accounts. We could have purchased Fidelity Insurance that included our CM, but the cost would have been exorbitant. Instead, we moved all of our reserve funds to a separate bank. We also moved all of our operating funds in excess of 3 month of anticipated needs. Only members of the Board have access to these accounts. We require 2 signers on all checks. Our Treasurer, who is not a signer, holds the physical checks. So there would have to be collusion between 3 Board members before any theft takes place.
We also had a lengthy debate with our insurance company about who constitutes an Employee. Although we don't have actual employees, we wanted to know if misappropriation by a Committee member volunteer would be covered. The conversation became quite convoluted, and we finally decided to adopt the 3 person rule described above. But for those of you who have individuals with access to HOA funds, you should dig deep into the details of any insurance rider that your insurance company offers.
It may sound like we are negative about our insurance company. Not so. The problem we encountered is that the more specific our questions got, the less we were able to rely on our local agent for reliable responses. And the more we talked with insurance company specialists, the less we were able to discuss our broader needs. We went through a maze of people that we believe we would have encountered with any insurer.
One of the side benefits of going through this process is that we are now signers on the bank accounts that our CM is managing for us. The last 2 times that we changed CMs, we were held hostage for our own money. That can't happen again.
Apologize for the long post. Hope it is helpful to some of you.
Sikubali jukumu. Read all posts at your own risk.