This year, we have worked on two different files that concerned crime policies and fidelity bonds. In one instance, a board member of a self-managed co-op absconded with hundreds of thousands of dollars. The client advised that the co-op did have a fidelity bond and, therefore, thought that it would be at least partially covered for such a loss. A review of the fidelity bond quickly showed that to qualify for recovery, the person who committed the theft had to be “tried and convicted” in court. While the hope is that the authorities will vigorously pursue the perpetrator, it is the authorities who determine whether they will pursue the case and bring it to trial. Therefore, even though our client would be able to prove a case in civil court, it is not enough for the bond to pay out.
Additionally, there was other restrictive language in the fidelity bond: that only an officer of the co-op who received compensation would be covered. With this type of language, the fidelity bond offered no protection if a board member stole money (a bad recipe in a co-op that is self-managed). In another instance, a managing agent absconded with more than $100,000 of co-op funds. In this instance, the co-op had a crime policy in place. However, the insurance company disclaimed on the grounds that the principal and/or employees of the management company were not “employees” of the co-op. The carrier argued that, even though the management company was employed by the co-op, it is not an “employee,” since it is not a person. We are currently in litigation with the carrier over this interpretation.
Just because a co-op has a crime policy or fidelity bond in place does not mean it is affording the co-op coverage if there is a defalcation. The self-managed building had a fidelity bond for the purposes of protecting it in the event funds were stolen. The board had no managing agent and the board members had unchecked access to funds. However, the fidelity bond they purchased would never have covered theft by directors and officers coverage because they do not receive compensation.
Additionally, the prerequisite that a conviction has to occur before the policy could be paid out is a high bar to recovery. In short, because of the restrictions, this policy was of very little value to the co-op. In the other case discussed, the co-op had crime policy coverage. Since the managing agent has access to co-op funds, it is imperative that a crime policy cover theft perpetrated by an agent. This policy did not unequivocally state that it covers theft by a managing agent. Many policies have the managing agent covered through an additional rider to the policy. The takeaway for our boards is to use an insurance broker who is well versed in insuring co-op and condo communities and can understand the nuances of how your community is structured. Once insurance is placed, have the crime policy or fidelity bond reviewed either by the insurance expert with your managing agent or attorneys.