Is your community association vulnerable to financial crimes?

What would happen to your association in the event of fraud, theft, or embezzlement? Your association leaders/board are volunteers and responsible for protecting the association assets from fraud, theft, or embezzlement.

Every association is looking to protect their funds from theft and other acts committed internally by board members and management companies and by outside criminal acts. It is no wonder that you can be confused when deciding on the Fidelity Bond Options available for your association. The insurance industry also creates confusion by referring to this coverage by several different names: Employee Dishonesty, Employee Theft, Fidelity Bond Insurance, Fidelity/Crime Insurance, and Crime.

The proper fidelity/crime coverage with all the agreements will extend to cover loss of money thru false pretense, phishing, social engineering, hacking of bank account and wire transfer fraud.

Your association may need to comply with FHA Guidelines, the Virginia Condominium Act, and the Virginia Property Owners Act, not to mention the fidelity requirements in your governing documents. These will require the Association to maintain a blanket fidelity bond or employee dishonesty insurance policy insuring the Association against losses resulting from theft or dishonesty committed by the directors, officers, or persons employed by the Association. Be sure to verify the property management firm is defined as an employee under the bond. This usually needs an endorsement attached to the policy.

How much coverage do you need? How do you calculate the amount needed to satisfy your fidelity bond/insurance requirement? The formula used is the total of the amount of reserve balances of the association plus one-fourth of the aggregate annual assessment of the association. The bond should be issued based on that calculation or the lesser of $1 million in Virginia.

Outlined below are the various options that can be included in fidelity/crime insurance:

1. Employee Dishonesty/Theft – This applies to employee’s theft and embezzling funds, which can include employee forgery or alteration. Employees can steal property as well as funds. Typically, these types of losses are embezzlements of money occurring over long periods of time. Be sure to have the definition of “employee” endorsed to include directors, officers, volunteers, and the management company as a designated agent under the policy.

2. Forgery or Alteration – Forgery or Alteration of your own documents, such as checks where a third party might steal from the mail or your office.

3. Inside the Premises -Theft of Money and Securities – Does your client have an exposure to burglary, robbery, or destruction on their premises or at their bank’s premises?
Example: The monthly assessments are stolen from inside the organization’s premises or while waiting in line to make a deposit at the bank.

4. Inside the Premises – Robbery or Safe Burglary of other Property – This is rarely needed because property theft should be covered in the Property Policy. Example: Damage to the premises occurred during a robbery. There is damage to the premises and the safe holding the monthly assessment checks.

5. Outside the Premises – This protects money, securities or tangible property for theft, disappearance, or destruction while off premises in the care of the Insured. Example: While transporting Association funds, a courier gets robbed and the damages include $5,000 that belongs to the Association.

6. Computer Fraud and Social Engineering Fraud and Fraudulent Impersonation – The use of any computer used by a third party to obtain money, securities or other property from your premises or account. Social Engineering means the intentional misleading of an employee through the use of electronic, fax, telephone or written instruction that misleads the employee to believe the information is true. Example: An employee of a vendor utilized by the Insured fraudulently gained access to the Insured’s computer and changed the bank routing number from the vendor to the employee’s personal bank routing number, causing a large sum of money to be transferred directly to the employee instead of to the vendor. Social engineering claim example: The treasurer of an association receives an email that purports to be from a vendor requesting they transfer funds from a trust account for work to be performed. The treasurer transfers the funds as requested. Later it is discovered a thief was impersonating the vendor and the funds were transferred to the thief’s account.

7. Funds Transfer Fraud – Almost any association is susceptible to a third-party gaining access to transfer money. The third party assumes the Insured’s identity to make the transfer. It can be through computer hacking or other methods of transfer. Imagine a third party using the micro-coding at the bottom of your client’s checks to make telephone purchases.

8. Money Orders and Counterfeit Money – Counterfeit money or checks that are intended to deceive and be taken as genuine. This pays when the Insured accepts bad U.S. issued money orders or counterfeit money in exchange for merchandise, money, or services.
Example: 6 months assessments in arrears totaling $5,000 are paid with a counterfeit money order and the Association unknowingly accepts it.

The fidelity /crime coverage is there to protect the associations funds. Do you have a website? Use Facebook? Or do you accept credit cards or EFT transfers for the collection of funds? Do you use a bank credit card system? You should also consider a cyber security liability and data breach policy. Do not confuse the coverage offered by a cyber endorsement that has been added to your general liability or directors and officer’s liability (D&O) policy with a stand-alone cyber security liability policy. The cyber security liability policy extends to cover unauthorized use of technology, computer programs or misplaced personally identifiable information (PII)and media liability. The data breach response services include notification expenses of the data breach, credit monitoring expenses, restoration expenses, cyber extortion and ransomware, forensic expenses, compliance, and regulatory fees.

This is a brief explanation and overview of the various agreements in a Fidelity Bond. It is meant only as a general understanding of the bond coverages and should not be construed as a legal representation of the bond coverages. Please refer to your specific bond contract for details on coverages, conditions, and exclusions.

Connie Phillips is a Certified Insurance Counselor (CIC) and a Community Insurance and Risk Management Specialist (CIRMS). She is also a Community Associations Institute Educated Business Partner (EBP). Connie can be reached at