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NpS (Pennsylvania)
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.


Sikubali jukumu. Read all posts at your own risk.
TimB4 (Tennessee)
Posts: 21,062
Posted:
Quote:
Posted By NpS on 07/02/2014 5:54 PM

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.

Our minimum fidelity bond/crime insurance policy is specified by statute, VA ยง 55-514.2:

Such bond or insurance policy shall provide coverage in an amount equal to the lesser of $1 million or the amount of the reserve balances of the association plus one-fourth of the aggregate annual assessment income of such association. The minimum coverage amount shall be $10,000. The board of directors or managing agent may obtain such bond or insurance on behalf of the association.

Quote:
Posted By NpS on 07/02/2014 5:54 PM

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.

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.

I'm very much against a management company having access to Association funds.
Letting them collect, track and deposit assessment payments are fine (you don't have to be on the account to make a deposit). However, they should not have access to spend funds.

If you think it's a good idea, contact me to arrange for your paycheck to be deposited into an account that only I have access to and trust me to pay your bills.

If it doesn't make sense to do that with your household money, it shouldn't be done with the Associations money.
NpS (Pennsylvania)
Posts: 4,216
Posted:
About 1/2 our HOs pay electronically. Checks go to lock box. We have direct electronic visibility into each HO's payment ledger. Our Treasurer approves all disbursements. Copies of all bank statements are mailed by the banks to our separate PO Box. Our CPA audits our books.

Might let you manage our money if you offered such protections.

Sikubali jukumu. Read all posts at your own risk.
TimB4 (Tennessee)
Posts: 21,062
Posted:
Np,

I think you may have missed my point. Based on your posting, the Board did not have control of the Associations funds (as they were not even on the signature card for the Bank). You even mentioned that when you changed MC, the Association was held hostage for access to their own money.

That is my point - it is the Associations money and only the Association should have access to it.
NpS (Pennsylvania)
Posts: 4,216
Posted:
Ah yes. That was an important lesson we learned. Will never again allow MC to have exclusive control of our funds.

Sikubali jukumu. Read all posts at your own risk.
NpS (Pennsylvania)
Posts: 4,216
Posted:
Ah yes. That was an important lesson we learned. Will never again allow MC to have exclusive control of our funds.

Sikubali jukumu. Read all posts at your own risk.
PitA1
Posts: 222
Posted:
the management co should have NO, zero, zilch control or access to HOA funds

the co should prepare the checks and present same on a scheduled basis for treasurer's and/or a second authorized signature

the signatory directors, for convenience, could stop by the co's office once a week

after the checks are signed then the co can 'stuff the envelopes' and get the bills paid

juuuuuust say'ng

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