Condo Media - November 2011 - 32

INSURANCE

management company that is included as an insured under an association’s fidelity insurance. An insured vs. insured exclusion is analogous to the insurance maxim that an insured cannot sue himself or herself. On occasion, an individual member of an association or a group of owners will sue the members of the board that “allowed” the theft to happen. That claim also is usually denied from D&O coverage based on the exclusion for any claim based on any board member obtaining a profit or remuneration the person was not legally entitled to receive. These three exclusions also apply when a management company is included as an insured under an association’s D&O policy. If a management company or manager steals an association’s funds, the theft would be an intentional dishonest act by an insured, a suit by the association against the management company/manager to recover the funds would be an “insured vs. insured” claim, and the claim would be based on the person obtaining an illegal profit or remuneration.

• Any natural person: 1. While in your service (and 30 days after termination of services); and 2. Whom you compensate directly by salary, wages or commissions; and 3. Whom you have the right to direct and control while performing services for you; or • Any natural person employed by an employment contractor while that person is subject to your direction and control;

$120,000 and when a claim was filed, the insurer denied coverage because the policy only covered employees of the corporation. The policy did not cover a member of the board. Insurers that specialize in community association insurance recognize a standard employee dishonesty policy does not cover the dishonest acts of directors. As a result, their forms broaden the definition of an employee to expressly include directors and officers. For example, one insurer’s policy defines an employee as a natural per-

Insurers that specialize in community association insurance recognize a standard employee dishonesty policy does not cover the dishonest acts of directors.
• Any natural person who is leased to the insured But, “employee” does not mean any: • Agent, broker, factor, commission merchant, co-signee, independent contractor or representative of the same general character; or • Director or trustee except while performing acts coming within the scope of the usual duties of an employee If your association is like most associations, it does not have any employees. A board of directors, whose members have access to an association’s funds, operates the corporation. Since board members rarely fit the definition of an employee, standard employee dishonesty insurance will not cover the theft of an association’s funds by board members. A self-managed community association recently learned first-hand the importance of properly identifying an “employee” for employee dishonesty insurance. The association’s property policy included $10,000 of employee dishonesty insurance. The association’s treasurer embezzled more than son who is a duly elected or appointed director, trustee, officer, committee volunteer or member, whether salaried or not. Another company’s policy includes an endorsement that defines an employee as “any natural person while serving as an elected or appointed member of a board of directors or board of trustees.” Yet another fidelity insurer’s policy provides coverage for non-compensated directors, officers and committee members. Employee dishonesty insurance only covers the theft of an association’s funds. It does not cover a loss of funds that is the result of a decision of the board of directors, i.e., investing reserve funds in high-risk investment tools or overpaying on a contract because using change orders in a construction contract are too burdensome. While those are examples of a “loss” of an association’s funds, the losses were not caused by the result of a theft. A “theft” is generally defined as an intentional unlawful taking of money, securities, etc., to the deprivation of an insured. The requirement that the act must be intentional is known as “manifest intent,” meaning the employee knew his or her

Employee Dishonesty Insurance
With few exceptions, community associations are nonprofit corporations under state statutes. Insurance that covers theft of a corporation’s funds is known as employee dishonesty insurance. It is a form of property insurance that indemnifies an insured for the loss of its property, money, securities or any property that is the result of acts of fraud, dishonesty, forgery, theft, larceny, embezzlement, misappropriation or any criminal act on the part of an employee of the insured. The coverage is included in some property insurance policies or coverage is provided by a separate insurance policy commonly known as a “crime” or “commercial crime” policy. Employees are commonly defined in employee dishonesty policies as:

CONDO MEDIA • NOVEMBER 2011

Condo Media - November 2011

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