What is fidelity insurance? An essential form of insurance, fidelity insurance protects the association from financial strain as a result of dishonest acts. Often required by law, this policy offers several benefits, making it imperative for association boards to obtain one.
What is Fidelity Insurance?
Fidelity insurance is a policy that protects an HOA or condominium from direct financial losses resulting from dishonest acts by board members, community managers, and employees. Dishonest acts include theft, embezzlement, and forgery.
Also known as HOA crime insurance or a fidelity bond, coverage is essential for protecting the association’s funds. In the event of theft or fraud, the insurer will reimburse the association for lost money.
Fidelity insurance typically covers the following:
- Theft by board members, officers, or employees
- Fraud or dishonesty by community managers or management company staff
- Embezzlement or misuse of HOA funds
- Forgery, altered checks, or fake financial documents
- Unauthorized withdrawals or transfers from HOA accounts
- Loss of operating and reserve funds
- Computer or wire fraud (if included in the policy)
The Importance of HOA Fidelity Insurance
Fidelity insurance plays a very practical role in preserving an association’s financial health. Dishonest acts are not always within the board’s control. Internal restraints can only do so much, after all.
Here are the benefits of HOA fidelity insurance.
1. Protects Against Theft and Fraud
The main purpose of fidelity insurance is to cover losses if someone with access to funds misuses them. This can include a board member, a treasurer, a manager, or even an employee of a management company. Even well-run associations face this risk. One dishonest act can drain operating funds or reserves.
2. Safeguards Reserve Funds
Reserve accounts often hold large balances for future repairs. Fidelity insurance can help ensure those funds are protected against fraud and other dishonest acts. Without it, the association may need a special assessment to recover the loss.
3. Reduces Financial Exposure for the HOA
The association must still pay its vendors even if funds disappear due to theft or fraud. Services must still continue. Fidelity insurance gives boards a way to recover funds without shifting the burden to homeowners.
4. Builds Trust With Homeowners
Owners want to know that the board is handling their dues properly. Having fidelity coverage in place shows that the board is taking financial protection seriously. This helps build trust between homeowners and the board.
5. Often Required by Lenders
Lenders, especially for condo units, may require associations to carry fidelity insurance before approving loans. It adds a layer of protection for the lender, knowing that the association can repay its loan even in the event of fraud or theft. Without this policy, communities may have trouble securing financing.
What is the Fidelity Insurance Requirement in Illinois?
To determine whether an association must obtain fidelity insurance, board members must review state laws and the governing documents.
Is an HOA Fidelity Bond Required in Illinois?
According to 765 ILCS 160/1-55 of the Illinois Common Interest Community Act, fidelity insurance is mandatory for associations with 30 or more units. This policy must cover those who control or disburse funds.
Is a Fidelity Bond for a Condo Association Required in Illinois?
According to 765 ILCS 605/12 of the Illinois Condominium Property Act, a condo association with 6 or more units must carry a fidelity bond. Coverage must extend to board members, managers, management company employees, and anyone else who has access to the association’s funds.
Who Does Fidelity Insurance Cover?
Insurance coverage can vary by policy. For example, D&O insurance covers directors and officers from liability. It does not typically extend to managers or employees. Meanwhile, master policies usually only cover the association’s property, not individual homes.
What is fidelity insurance coverage? Fidelity insurance generally applies to the following persons:
- Incumbent board members
- Past and future board members
- Committee members
- Community or property managers
- Accountants
- Other employees
For past board members, fidelity insurance typically applies if the dishonest act was discovered while the policy was in force and occurred within a specified period. While coverage periods can vary, it usually extends to former board members for a limited time, such as 12 months, after they leave their role.
How Much Should Fidelity Insurance Coverage Be?
Coverage amounts will depend on state laws and the association’s governing documents. Board members would do well to consult their manager or lawyer for guidance.
In Illinois, HOAs are required to secure fidelity insurance for the maximum commercially available coverage or the coverage reasonably required to safeguard the association’s funds. This is according to 765 ILCS 160/1-55.
On the other hand, 765 ILCS 605/12 dictates coverage amounts for condo associations. As per the statute, the coverage amount for COAs must be as high as possible. It must at least equal all the association’s operating funds plus all reserve funds.
Board Qualifications That Affect Fidelity Insurance
For many associations, candidates must have certain qualifications to run for a position on the board. Discriminatory qualifications are typically not allowed, but a candidate’s past criminal conviction can interfere with the association’s ability to secure fidelity insurance.
Some insurers may not sell to an association if a current board member has a felony conviction. Others may jack up the insurance premium or deductible. After all, insurers take on risk, and felony convictions can increase the risk of loss, especially if the charge involves theft or fraud.
For this reason, most associations don’t allow candidates with a criminal conviction to run. It is not due to any discriminatory reason, but rather to the association’s inability to obtain fidelity insurance.
What is Fidelity Insurance? Explained!
Fidelity insurance is one of the most essential types of insurance policies an association should have. It is even mandated by law. Board members must understand how this policy works and how much coverage they must secure. In doing so, they can comply with state laws and their governing documents.
Hillcrest offers HOA management services to communities in Chicago. Call us today at 630-627-3303 or contact us online to request a proposal!
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