California HOA Fidelity Bond

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Effective January 1st, 2019, each HOA will be obligated to purchase and maintain a California homeowners association fidelity bond to protect owner's collective HOA assets from the dishonest acts of board members and directors. California Civil Code (Sec. 6., 5806) has been modified to contain the following language:

"Unless the governing documents require greater coverage amounts, the association shall maintain fidelity bond coverage for its directors, officers, and employees in an amount that is equal to or more than the combined amount of the reserves of the association and total assessments for three months. The association's fidelity bond shall also include computer fraud and funds transfer fraud. If the association uses a managing agent or management company, the association's fidelity bond coverage shall additionally include dishonest acts by that person or entity and its employees."

Fidelity bond underwriting is simple. Qualification is generally based on THREE important considerations. Special attention should be paid to correctly answering application questions pertinent to these.

Separation of Duties

Within the applicant's organization there must be a separation of financial duties, i.e., the person(s) that make deposits, withdrawals, wire transfers and authorizes/writes checks CANNOT be the same individual that reconciles bank account statements at month's end. The questions about this are generally in the "INTERNAL CONTROLS" section of an application.

Routine CPA Input

The applicant organization should have an independent party (CPA, audit firm, etc.) look at the books annually at minimum. This becomes increasingly important as the requested coverage amount increases. Ideally, a fidelity insurer would like to receive an annual financial statement prepared by a CPA to full audit standards. If any recommendations were made by the CPA, then underwriters will want to understand how the applicant has instituted those recommendations into general operating practices and procedures.

Professional Property Managers

If the HOA's business is run by a property manager then the applicant for the HOA fidelity bond should indicate that during the application process. The specific exposures of concern for underwriters are funds control and vendor relationships. Will the property manager have access to HOA bank accounts? If so then clearly established limits to the manager's authority must be established. Will the property manager retain unilateral authority to approve service providers? If so, then there must be a protocol for reviewing those relationships regularly to prevent a fraud (self-dealing) and performance.

To apply for a California HOA idelity bond, we require the following:

• Homeowner's Association Fidelity Bond Application
• Applicant's most current fiscal year end financial statement
• Loss runs for previous five (5) years. *Only if HOA has carried fidelity coverage.