Fidelity bonds, also known as “crime insurance” or “fidelity insurance,” are policies that protect the HOA from unexpected financial losses like theft and fraud. Employees, volunteers, and management companies who work with HOA funds have to keep the organization’s best interest in mind. If someone breaches their duty, however, fidelity bonds can replace the money that is lost.

The Federal Housing Administration (FHA) and Fannie Mae require homeowner’s associations to carry this coverage. Loans for the purchase of homes in the community may be denied if your HOA does not have sufficient fidelity bond coverage.

How Much HOA Fidelity Bond Coverage Is Required?

According to the U.S. Department of Housing and Urban Development (HUD), associations must carry fidelity policies that meet FHA standards by covering:

• An amount equal to three months of dues and assessments
• All reserve funds
• All association employees, volunteers, board members, and management company personnel involved in the organization’s finances

Additional federal guidelines for Fannie Mae-backed loans require:

• Coverage for three months of scheduled maintenance fees
• A deductible of $25,000 or less

Some states have requirements over and above the federal guidelines, and an HOA’s governing documents may also contain details about how much fidelity bond coverage should be maintained. If there is any question about the appropriate levels of fidelity bond coverage for your organization, consult with an attorney or insurance agent.

What Events Are Covered by HOA Fidelity Bonds?

HOA fidelity bonds protect the association from dishonest individuals who decide to put their financial interests ahead of the organization’s. Once adequate coverage levels are established, and fidelity bonds are in place, your company and the community associations you manage will be prepared to handle several potentially devastating scenarios.

Events covered by HOA fidelity bonds include:

• Forgery — Illegal alteration of checks or contracts
• Employee theft — Siphoning of funds or other assets by HOA or management company employees or volunteers
• Loss of funds while in transit — Mishandling of cash or other assets that have been received but are not yet recorded on bank statements
• Funds transfer fraud — Inappropriate fund transfers through electronic, telephonic, or written instructions
• Computer fraud — Unauthorized use of a computer system to transfer association assets out of the rightful accounts

The fidelity bond coverage must extend to everyone who might handle HOA funds or property, including reserves and regular operating expenses. This list includes, but is not limited to:

• Board members
• Board officers and directors
• HOA employees and other volunteers
• Property managers
• Bookkeepers
• Association management companies and their staff

In some cases, fidelity bonds may also cover theft or fraud by third parties who are not otherwise associated with the HOA or management company.

It is a management company’s responsibility to ensure each association in its portfolio is compliant with federal and state regulations, including fidelity bond coverage. Take the time to review applicable guidelines, consult with legal and insurance professionals, and educate association boards about how fidelity bonds can keep their organizations running smoothly and efficiently.