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.
According to the U.S. Department of Housing and Urban Development (HUD), associations must carry fidelity policies that meet FHA standards by covering:
Additional federal guidelines for Fannie Mae-backed loans require:
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.
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:
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:
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.