Condo Media - November 2011 - 31

“

e’ve been robbed!” Those are words that are being said with increasing frequency by boards of directors and members of community associations. Unfortunately, theft of community association funds by board members, managers, staff and others with access to association funds is but another consequence of the difficult economic times being experienced by many Americans, and the reported incidents increase every day. These incidences are abetted by sophisticated software that can produce credible but fake documents, and by the increasing use of credit cards and online transactions. While risk management can help prevent or minimize some theft, it is critical that the board understand the key insurance that might be available for theft — fidelity insurance. The practical effect of the theft of an association’s funds depends on the overall financial condition of the association. However, because the theft of funds may be committed by neighbors and trusted agents via keystrokes and pen strokes, the emotional impact on members of community associations is more traumatic than if done by a stranger at the end of gun barrel. The initial shock expressed by members usually turns to anger as the extent of the theft is uncovered. Many associations channel that anger into efforts to recover the money. Hopes for recovery of funds usually focus on the association’s insurance coverage, rather than the thief’s assets. Spirits run high when copies of insurance policies show that Directors & Officers (D&O) coverage and insurance for employee dishonesty were in effect at the time the theft was committed. However, the elation instantly reverts to anger if the claim is denied by the insurer. While most comments made about insurers when a fidelity claim is denied cannot be published, a common one that is acceptable is “Why did we pay for the coverage if it does not cover the claim?” It is a legitimate question that can usually be

answered simply by showing the members of a board the definition of the insured or the list of exclusions of coverage in the policies. This leads to the next logical question, “Is there a way that we can avoid the absence of coverage in the future?” The answer to that question is “yes.” A board can avoid the shock and frustration caused by an uninsured theft of an association’s funds. It requires each board to do two things: understand the terms, conditions and exclusions of a policy; and have the policy reviewed to determine the persons it covers and take steps to prevent an uninsured person from having access to an association’s funds.

a loss covered by the policy. Payment is not guaranteed, but depends on the terms of the policy. Fidelity insurance is in effect during a specific policy period. Unlike in a bond, if the fidelity insurer pays for a loss, the insurer does not have a right of recovery against the insured (i.e., the community association).

D&O Insurance Is Not Fidelity Insurance
Most directors of community associations and the members mistakenly believe that when a board member commits a theft of an association’s funds that a D&O insurance policy will cover the loss. D&O policies cover the wrongful acts of directors and officers. Wrongful acts are defined in virtually every D&O policy as any act, error or omission, neglect or breach of duty committed or attempted to be committed by the association or by one or more of the board members. Based on that definition, there is a common misunderstanding that D&O coverage applies to the act of theft by an insured or a claim that a board was negligent if it allowed a fellow board member or manager to steal an association’s funds. The reason D&O policies do not cover fidelity claims is because of three exclusions that apply to the coverage. D&O policies exclude coverage for any loss brought about or contributed to by any deliberate fraudulent or dishonest act or omission or any purposeful violation of a law by an insured. The theft of an association’s funds by a board member is a deliberately fraudulent and dishonest act that results in the claim being excluded from coverage. The second exclusion is known as an “insured vs. insured” exclusion. It applies to a claim brought by the association, an insured, against the board members, also an insured, that committed the theft or allowed the theft to occur. The insured vs. insured exclusion also applies to claims by an association against a

Fidelity Insurance
“Fidelity Insurance” is the generic reference to insurance that reimburses an insured for a theft of its money or property. Most people initially refer to insurance coverage for theft of funds as a “fidelity bond,” not fidelity insurance. The two provide different forms of coverage. A “bond” is a three-party contract where the bonding company guarantees the honesty of one party to a second party. If there is a breach of honesty, the bonding company reimburses the second party for the amount of the loss caused by the insured party. The bonding company will usually then pursue the dishonest party for recovery of the amount it paid to the second party. Inasmuch as a fidelity bond is a guarantee of payment, they are expensive and require an investigation of each of the “bonded” persons. Bonds depend on the “character, capacity and credit” of the person seeking to be bonded. Bonds are in effect until cancelled Unlike a bond, a “policy” of insurance is a two-party contract involving an insurer and the insured. An association, as the insured, is known as the first party. The claim to recover a loss belongs to the first party. The insurer is the second party that agrees to reimburse the insured, not a third party, for

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CONDO MEDIA • NOVEMBER 2011

Condo Media - November 2011

Table of Contents for the Digital Edition of Condo Media - November 2011