As a condominium association board member or property manager, safeguarding the community’s financial well-being is a top priority. Two critical insurance coverages that can help protect your association are Directors and Officers (D&O) insurance and fidelity bond coverage. In this post, we’ll break down what these coverages are, what they typically cover, and key considerations for ensuring your association is adequately protected.
What is Directors and Officers (D&O) Insurance?
Directors and Officers (D&O) insurance provides coverage for the board members and officers of a condominium association. Board members are often volunteers, and their decisions can expose them to potential lawsuits or claims alleging wrongdoing. D&O insurance helps protect these individuals from personal liability when performing their duties on behalf of the association.
What Does D&O Insurance Cover?
D&O insurance generally covers:
- Legal Defense Costs: Attorney fees and court costs associated with defending claims against board members.
- Judgments or Settlements: Financial compensation that the association or its board members may be required to pay due to a claim.
- Claims of Wrongful Acts: Allegations of mismanagement, negligence, or breaches of fiduciary duty.
- Employment-Related Claims: Claims related to wrongful termination, harassment, or discrimination in relation to association employees.
What’s Not Covered by D&O Insurance?
D&O insurance typically does not cover:
- Fraud or Illegal Acts: Deliberate wrongdoing, fraudulent acts, or criminal behavior by board members.
- Bodily Injury or Property Damage: These types of claims are usually covered by general liability insurance, not D&O.
- Claims by Insured Persons: If one board member sues another, D&O insurance may not cover this.
How Much Coverage Do You Need?
Determining the appropriate level of D&O coverage depends on several factors, such as the size of your association and its assets. Most policies offer coverage limits ranging from $1 million to $5 million. It’s essential to review the association’s risk exposure and ensure that the policy’s limits provide adequate protection.
What is Fidelity Bond Coverage?
Fidelity bond coverage, also known as a fidelity insurance policy or employee dishonesty coverage, protects the association from financial losses resulting from theft, fraud, or embezzlement by board members, employees, or even contractors who handle the association’s funds.
What Does Fidelity Bond Coverage Protect Against?
This type of insurance typically covers:
- Embezzlement or Theft: If an employee or board member steals association funds, fidelity bond coverage can help recover the lost money.
- Fraudulent Acts: Any intentional fraudulent act by someone in a position of trust who has access to the association’s finances.
- Loss of Property: Sometimes, fidelity bonds cover not just cash but also tangible property, such as maintenance equipment or supplies.
What’s Not Covered by Fidelity Bond Insurance?
- Negligence or Unintentional Errors: It does not cover losses due to honest mistakes or errors in judgment, which may fall under errors and omissions insurance.
- Non-Financial Damages: Losses unrelated to the direct theft of funds or assets, such as reputational harm, are typically not covered.
- Acts of External Parties: Theft or fraud committed by external contractors not specified in the policy may not be covered.
How Much Coverage Should Your Association Have?
Industry standards, including the Federal Housing Administration (FHA) and Fannie Mae guidelines, recommend that associations carry fidelity bond coverage equal to or greater than the total amount of funds in the association’s reserves plus three months of assessments. This ensures that the association’s finances are adequately protected against internal theft.
Key Considerations for Condominium Associations
- Review Policy Exclusions: It’s essential to thoroughly understand what’s not covered by both D&O and fidelity bond policies. Consulting with an insurance professional can help you identify potential gaps in coverage.
- Regularly Update Coverage Amounts: The financial health of your association may change over time, and the coverage you need should evolve accordingly. It’s a good practice to review your insurance policies annually to ensure they keep pace with your association’s finances and risk exposure.
- Know Your State and Governing Document Requirements: Many states, including Illinois, have specific requirements for D&O and fidelity bond coverage, and your association’s governing documents may mandate certain coverage amounts.
- Ensure Comprehensive Coverage: While D&O insurance and fidelity bond coverage protect against specific risks, they should be part of a broader insurance portfolio, including general liability, property insurance, and workers’ compensation if your association has employees.
Directors and Officers insurance and fidelity bond coverage are essential components of a comprehensive risk management strategy for any condominium association. By understanding what these policies cover, their limitations, and the appropriate coverage amounts, associations can better protect their board members, employees, and the community’s financial well-being. Be sure to consult with your insurance provider to tailor these policies to meet your association’s specific needs.
By ensuring adequate D&O and fidelity bond coverage, you’re taking crucial steps toward safeguarding your association from financial loss and legal challenges.
