What is a fidelity bond? In an HOA or condo, it’s a safety net that protects the community’s money from theft or fraud. In Texas, some HOAs wonder if it’s just something nice to have or something they’re legally required to carry.
What is a Fidelity Bond?
A homeowners association fidelity bond is there to protect the association from losing money because of dishonest acts. This includes when a board member, manager, or anyone handling funds steals, forges checks, or tampers with the books.
What is a fidelity bond? Fidelity insurance is sometimes called employee dishonesty coverage or crime insurance. It focuses on internal theft and fraud rather than accidents.
The Importance of Fidelity Bond Coverage
Every association deals with money. Dues are coming in, vendor payments are going out, and reserve accounts need to stay healthy. With several people having access to the funds, things can quickly go wrong.
A fidelity bond gives the HOA or condo association some peace of mind. If a board member or manager commits fraud or embezzlement, the community isn’t left empty-handed.
It also helps build trust with homeowners and banks. Lenders like Fannie Mae and FHA typically require proof of fidelity coverage before approving a condo project.
Does Texas Law Require Han OA Fidelity Bond?
Under Texas Property Code Section 82.102, condominiums may obtain fidelity insurance that the board deems necessary. There is no statutory requirement to purchase a fidelity bond.
That said, many communities have it written into their bylaws or CC&Rs that the board must carry a fidelity bond or insurance policy. Some even say how much coverage is necessary or how often the bond should be renewed.
Even if it’s not in the law or governing documents, boards would still be smart to have it. Losing reserve funds because someone got greedy can wipe out a community’s savings overnight.
What Does a Fidelity Bond Cover?
A fidelity bond isn’t just about protecting against stolen cash. It covers a whole range of shady acts — theft, fraud, forgery, and even newer risks like online wire scams.
Here are the risks most fidelity bonds cover.
1. Theft and Embezzlement
This is the most basic and most used coverage. It kicks in when someone directly steals money from the association. Maybe a treasurer writes extra checks to themselves or an employee pockets cash from dues payments. The bond helps the HOA recover that money.
2. Forgery and Alteration
Forgery coverage is for those sneaky situations when someone fakes documents or signatures. Perhaps they forge the president’s name on checks or change vendor names to reroute payments. It happens more often than most think.
3. Computer and Wire Fraud
Many HOAs now use online payments, which carry digital risks. This part of the bond covers electronic theft. For example, when someone manipulates online banking or authorizes wire transfers to the wrong account.
4. Fraudulent Disbursements
Sometimes, theft doesn’t look like theft. It’s disguised as paperwork. Someone could make up a fake invoice, issue duplicate payments, or inflate vendor charges. If an employee or board member authorizes those payments for their own benefit, the bond covers it.
5. Loss of Funds in Transit
Not every association uses digital payments. If the treasurer or manager still deposits checks or cash by hand, this part matters. It covers money that’s stolen while being delivered to the bank.
6. Credit Card and Debit Card Misuse
If a board member or staff member uses the association’s credit or debit card for personal use, the fidelity bond covers that, too. Maybe they bought groceries, gas, or something entirely unrelated for HOA business. The fidelity bond can reimburse the association upon proof of fraud.
7. Dishonest Acts by Third Parties
Some policies go a step further and cover losses that people outside the HOA cause. This could be vendors, accountants, or community managers. If a management company employee steals money from the HOA, the community can still recover the funds, but only if the HOA is listed as an additional insured on the policy.
8. Investigative and Legal Costs
When money goes missing, the investigation can get expensive fast. Some bonds cover the costs of hiring forensic accountants, auditors, or lawyers to trace the theft and recover the loss. It’s not something every policy includes, but it’s worth adding if possible.
Who Does HOA Fidelity Bond Cover?
Fidelity bond protects the association itself. The association is the insured party, and it gets reimbursed if there’s a covered loss. It usually applies to:
- Board members, officers, and committee members
- Association employees and managers
- Bookkeepers or financial staff
- Management company employees handling HOA funds
- Volunteers who can access financial records or accounts
Many boards make the mistake of assuming their management company’s bond automatically covers them. This isn’t true unless the policy specifically names the association. For this reason, it’s best to have a separate bond in the association’s name.
How Much is Fidelity Insurance?
The cost of fidelity insurance can vary depending on the association’s size and the amount of money it manages. Smaller communities may pay only a few hundred dollars a year. Larger ones that manage millions in funds, on the other hand, can pay several thousand.
Most experts say coverage should equal all reserve funds plus about three months of dues. This is usually enough to meet lender standards and protect against major losses.
Associations with clean books and good financial controls tend to get better rates, too. Simple measures like requiring two signatures on checks, conducting regular audits, or separating duties between people can go a long way toward lowering premiums.
What is a Fidelity Bond? Answered!
A fidelity bond protects an association and its finances when someone breaches trust. While communities in Texas may not be required to obtain such a policy, it’s still beneficial to have it. After all, insurance is the first line of defense when something goes wrong.
PAMco offers exceptional HOA financial services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
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