New York's Cooperative and Condominium Community

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Fidelity Bonds & Theft Insurance: The Basics

Mitch Warner in Legal/Financial on April 8, 2014

New York City

April 8, 2014

The rule states that co-ops and condos must carry a fidelity bond equal to 25 percent of the annual maintenance or common charges. As the recession deepened, numerous loan applications were denied for buildings that failed to meet this standard.

Today, most co-op and condo boards have crime insurance. But the smart ones also insist that their management company carry a fidelity bond, even though such instruments cover theft only by employees of the management companies, not by the principals.

"Many buildings won't sign on with a management company unless they [the management company] have insurance," says Barbara Strauss, executive vice president of York International Agency, an insurance broker. "But co-ops and condos have to have their own policies as well, because you can't depend on the management company's bond to cover you if one of their employees is stealing from you. If they're stealing from you, they might be stealing from others, and the limit on the management company's policy may not be adequate."

The good news is that fidelity bonds are not prohibitively expensive. One co-op with about $1 million in annual maintenance charges took out a policy with a $250,000 limit, in accordance with the federal rules. It cost the co-op about $725 per year.

Three to Four Months 

Strauss advises her clients to buy insurance to cover three to four months of a building's annual maintenance. She also advises boards to insure at least 10 percent of the reserve fund. "Buy a limit you feel comfortable with," she says. "You can also buy a higher deductible to keep costs down."

And sometimes board

members steal money

— another reason the

co-op or condo

needs its own policy.

The mortgage crisis has caused a fundamental change in the way co-ops and condos approach fidelity bonds, according to several insurance agents. "Until the requirement was enforced, some buildings didn't see the necessity of fidelity bonds," says Ed Mackoul, president of Mackoul & Associates Insurance. "These days, pretty much everyone has it. A lot of lenders won't close on a loan unless that requirement is met."

Like Strauss, Mackoul advises boards to back up their insurance by insisting that their management company have its own fidelity bond. "Both can and should carry it for a number of reasons," he says. "If the property manager takes off with money, why should the co-op or condo have to rely on its own coverage? There are also instances where a board member takes off with money, which is another reason why the co-op or condo needs its own policy."

The Fannie Mae Selling Guide explicitly states that a fidelity bond must cover at least three months' worth of a building's annual maintenance charges. But more insurance might be required. "The policy must cover the maximum funds that are in the custody of the homeowners' association (or co-op corporation) or its management agent at any time while the policy is in force," the guide notes.

Implement Safeguards 

According to Steven Lefland, assistant vice president and co-op project supervisor at Everbank, a Florida-based lender that works with Mackoul, a lower amount of coverage is acceptable if the board and managing agent adhere to one or more of the following three controls:

(1) Separate bank accounts are kept for the building's working account and its reserve account — and the bank sends monthly statements directly to the board. 

(2) The management company maintains a separate bank account and records for each of its buildings and is not authorized to make withdrawals from the reserve fund.

(3) Two board members sign every check drawn on the reserve fund.


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