A fidelity bond is an insurance policy that every homeowners association needs. This type of insurance protects against theft or fraud. In the event that a board member, manager, or committee member steals from the association’s funds, fidelity insurance is the first line of defense. All association boards should understand what this policy covers.
What is Fidelity Bond Coverage?
Simply put, a homeowners association fidelity bond is an insurance policy that protects the association’s funds against theft or fraud, specifically at the hands of the people who manage it. This can include board members, property managers, employees, and other volunteers.
Many wonder what the difference is between a fidelity bond and an employee dishonesty bond. The truth is, there isn’t much of a difference. In most cases, they mean the same thing.
Both types of insurance cover losses that stem from theft, embezzlement, or fraud. Some policies refer to them as crime coverage, but the protection is essentially identical. The goal is to make sure that if someone with financial access decides to steal or misuse funds, the association can recover those losses.
What Does HOA Fidelity Bond Cover?
Fidelity bond coverage safeguards the association from theft, dishonest acts, and fraud. This includes both money and property. Here are the things that a fidelity Insurance policy typically covers.
1. Theft of Money or Property
This is the most straightforward protection. If a board member, manager, or employee steals cash, checks, or physical property belonging to the HOA, the policy may cover the loss.
Theft can encompass a wide range of activities, not just physical theft. It might be an overpayment to themselves, the sale of community equipment without approval, or even the pocketing of funds collected during events.
Since associations handle a great sum of money, board members or managers can easily miss small amounts. Fidelity coverage helps ensure that when funds go missing, the association can recover those losses. This eliminates the need to levy special assessments or increase regular dues to address the damage.
2. Forgery or Alteration
Forgery or alteration coverage can cover situations in which someone fakes a signature or alters financial documents for personal gain. For example, a board member might sign another officer’s name on a check or alter invoices to receive payments. Even the smallest acts of forgery or alteration can have a huge negative impact on the association’s finances.
Fidelity insurance can reimburse the association for these losses. It can also help the community repair any damage to its financial standing. It also covers legal costs arising from investigating or disputing the fraudulent documents.
3. Fraudulent Electronic Transfers
Modern HOAs rely on online banking and digital payments, which opens the door to cyber-related theft. This part of the fidelity bond coverage protects the association when money is transferred electronically under false pretenses. An example is a phishing scam in which someone impersonates a treasurer or a management company. Another example involves cases where a trusted individual wires funds to a fake vendor account.
Without this protection, boards will have a hard time recovering funds stolen through electronic fraud. Some policies even extend to losses from online banking breaches or unauthorized access to digital accounts.
4. Misuse of Credit or Debit Cards
Many associations issue payment cards for board or management use, often for maintenance, supplies, or emergency expenses. Problems arise when someone uses those cards for personal purchases. Maybe a board member charges fuel for their personal vehicle, or a volunteer buys items unrelated to HOA business. These are considered acts of dishonesty, not simple mistakes.
Fidelity insurance covers the amount spent and can include any associated fees or penalties. It also ensures that the association doesn’t have to rely on lengthy repayment plans or lawsuits to recover what was lost.
5. Collusion or Conspiracy
Sometimes, fraud isn’t the work of one person. It can involve two or more people working together to cover their tracks.
Collusion can take many forms. One example is when a treasurer and an accountant falsify financial statements. Another would be when a board member teams up with a vendor to modify invoices. It is often more difficult to detect this type of fraud because more people are involved.
A strong fidelity policy still applies in these cases. It recognizes that multiple insiders can be responsible for the same dishonest act and provides coverage for the total loss, not just one individual’s share.
Why HOAs and Condos Need Fidelity Bond Coverage
Homeowners associations and condominiums handle large sums of money every year. Monthly assessments, reserve funds, and special assessments all pass through the association’s accounts. With so much money involved, the risk of theft or financial misconduct is real.
Board members and managers are expected to act in good faith, but mistakes and temptations can happen. Fidelity bond coverage gives the association a financial safety net. Without it, even one dishonest act could wipe out reserve accounts or derail major projects.
For condominiums, the risk can be even higher. Condos typically have larger budgets and more complicated finances. Even a single dishonest person or a small mistake can lead to significant losses. With fidelity insurance in place, a condo association can ensure it recovers quickly without imposing additional financial obligations on homeowners.
Who is Covered by Fidelity Bond Insurance?
An HOA’s fidelity bond policy doesn’t just cover board members. It usually extends to a wide range of people involved in managing or handling the association’s money. Coverage typically includes:
- Current and past board members
- Future board members who later join the board
- Committee members who oversee finances or projects
- Community managers and management company employees
- Volunteers with access to funds or records
- Spouses of board members and volunteers, if they’re involved in association operations
The goal is to ensure everyone who could access the HOA’s funds is covered under the policy. That way, the association doesn’t face a coverage gap if a new board member joins or a volunteer takes on financial tasks.
Is Fidelity Bond Insurance Required in Texas?
Under Texas Property Code Section 82.102, which applies to condominium associations, boards can purchase fidelity bonds that they deem necessary. Typically, associations obtain coverage at least equal to the greater of the sum of three months’ assessments plus reserve funds. That said, the association’s bylaws may have specific requirements.
Non-condo HOAs don’t have statutory requirements for fidelity insurance, but that doesn’t mean these associations are off the hook. Boards might still need to obtain fidelity bonds depending on their governing documents. Most experts and professionals also recommend purchasing fidelity insurance. Some lenders even require it.
How Much Does a Fidelity Bond Cost?
The cost of fidelity bond coverage can vary depending on several factors. These include the association’s size, annual revenue, and the level of protection required. Smaller HOAs might pay only a few hundred dollars per year, while large condominium associations could pay thousands.
Premiums generally increase with higher coverage limits. For example, a bond that covers up to $100,000 might cost less than $400 a year, but a policy covering several million dollars in reserve funds will cost significantly more. Working with an insurance broker experienced in HOA and condo policies can help the board find the right balance between cost and protection.
A Better Future
Fidelity bond coverage is one of the smartest safeguards an HOA or condo can have. It protects community funds from theft, fraud, and misuse — no matter who’s responsible. Whether the law requires it or not, it is important to consider obtaining this coverage to build trust and maintain financial stability.
Graham Management offers exceptional HOA financial management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more.
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