Q: I read your columns all the time and find them very informative. One important subject that you should cover and advise on is the possible embezzlement of association funds and safeguards to protect the members.
I have often read about stolen funds in all types of organizations and the financial implications embezzlement can cause.
Annual meetings are coming up, at which new directors and officers will be seated, so it is important it have them placed on the association’s “bond policy.” – S.D., via email
A: You are right on the money when you express concerns about possible embezzlement of association funds.
In researching the answer to your concerns, I Googled “Florida condominium embezzlement” and was mortified at the number of results generated. Community associations collect, control and disburse very large sums of money that belongs to others.
One of the first headlines that popped up was “condo president gambles away community’s money, police say.” That president allegedly commingled association funds and blew almost $150,000 at a casino.
It is not just volunteer directors who have absconded with association funds. Incidents have included attorneys, contractors, vendors and office staff.
Condominium, cooperative and homeowners’ associations are all now required by law to obtain and maintain fidelity bonding. A fidelity bond is essentially insurance that covers the theft of association funds. Such coverage is also sometimes referred to as “crime coverage,” “theft insurance” or as an “employee dishonesty” bond.
What is fidelity bonding and what does it cover (or not cover)? For condos, coops and HOAs, the requirements are that an association must carry insurance or fidelity bonding of all persons who “control or disburse” association funds. The insurable amount is required to be the “maximum funds that will be in the custody of the association or its management agent at any one time.”
The persons defined as those who control or disburse association funds are anyone authorized to sign association checks as well as the association president, secretary and treasurer, regardless of whether they are authorized to sign checks.
Note that the requirement for fidelity bonding for HOAs only became effective on July 1 of this year. Unlike the mandatory requirements for condos and coops, in an HOA, a majority of the voting interests present at a duly called meeting may waive the bonding requirement on an annual basis. Good idea? I don’t think so.
A board of directors of a community association is the fiduciary of the money of the members. A fidelity bond is only going to provide limited protection, but it is better than no protection at all.
Also keep in mind that the insurable amount fluctuates, especially when funds from a special assessment have been collected but not yet spent.
So, what should a prudent association do?
• Be aware of potential denials of coverage. Consult with insurance and legal professionals in this regard.
• Make sure everyone who should be bonded is bonded. An association that engages a management company should be sure that association funds, not just those of the company, are insured.
• Only engage third parties (contractors) that are bonded and insured. How many times have you heard a company include as part of their qualifications that it is “bonded and insured?” Check it out and make sure that the association is named as an additional insured.
The cost of fidelity bonding is the responsibility of the association. So is following “best practices” in the conduct of association financial matters.
Although I defer to insurance and financial professionals in this regard, I would offer the following: The person who performs the monthly bank reconciliations (and it should be at least monthly!) should never be the one authorized to sign the checks.
FROM MY VAULT LABELED “YOU CAN’T MAKE THIS STUFF UP”
• Foreclosure king on verge of losing law license, but keeps $58.5 million windfall.
According to the Palm Beach Post, attorney David Stern, who allegedly capitalized on the misfortune of many who lost their homes to foreclosure, apparently never has to fret over repaying his student loans.
• Charlie Nader, a humor writer from Chicago, posted a bogus “association president’s newsletter” that contained the following:
“Keeping Exotic Animals out of the Meth Lab
“It’s very simple: Unsold exotic animals are NOT to be stored anywhere near the shared meth laboratory or “commons area.”
“How many of our capuchin monkeys and komodo dragons need to die after going on meth-fueled killing rampages across the city before everyone gets on board with this seemingly easy-to-follow rule?
“Thanks for your cooperation, everybody, and please let me know if there are any more problems with that finicky front gate.”
And you thought your association was dysfunctional?
Tamela Eady is a Florida Bar board-certified real estate attorney with 25 years’ experience. She is an attorney with the the Law Offices of Kevin T. Wells PA in Sarasota, concentrating her practice on community association and real estate. The subjects discussed in her columns are not intended as specific legal advice to anyone and are subject to principles that may change. Questions may be modified for clarity or for brevity. Email questions for possible inclusion in a future column to teady@kevinwellspa.com.
