Barbara Strauss, Executive Vice President
The Lay of the Land
A board treasurer’s heart will always sink when he notices a pattern of odd expenditures in the monthly run of checks. With a little digging, the treasurer might learn that the managing agent paid a small amount each month to a phony vendor, a limited liability company set up by the agent.
There are a number of issues that arise when a board relies solely on its managing agent’s crime insurance (also known as a fidelity bond). It is designed as protection in situations where one party is handling funds on another’s behalf. The first issue arises from a claims-handling standpoint. Once the manager is the named insured on his own crime policy, the board does not have the ability to make a claim under that policy, and the insurance carrier has no obligation to discuss claim matters with the board – only with the managing agent.
This means the board would need to make a demand against the agent, probably involving a lawyer drafting a letter demanding reimbursement, then waiting for the manager to file the claim with his insurance carrier, then waiting for the agent to get paid by his insurance company, and, finally, waiting for the funds to get back to the board.
All of this also presumes that the manager purchased high enough limits to cover all of the loss. If one board suffers a con, chances are other boards under the same management are being conned as well. How do you respond if the agent hasn’t bought a high enough limit to cover his theft? You buy a fidelity bond.
The second set of issues comes from a coverage standpoint. A key exclusion in every crime policy is the exclusion for theft by the owners of a business. This exclusion prevents an agent who’s down on his luck from creating a phony scheme to defraud the insurance company. The agent’s policy has this exclusion. However, a properly placed policy for the board will have full coverage – including the managing agent under a designated agent’s endorsement, also called a managing agent’s rider.
For the limited cost of a fidelity bond, the board can have its own coverage. It can then control the claim, have its own dedicated limits, and avoid a potential denial of the policy because it includes all of the manager’s employees.
Mortgage lenders are requiring co-op and condo boards to carry a fidelity bond with limits of no less than four months’ maintenance fees or common charges. A board should consider the amount in the reserve fund and buy a limit with which it feels comfortable – or that would at least be enough to put it back into the position it was in before the loss.