FIDELITY BONDING – INSURANCE AGAINST FRAUDULENT OR DISHONEST ACTS
by Dawn Mitchell (HUB International Insurance Brokers)
On January 1, 2020, Section 62.5 of the Condominium Property Act Regulations will make it mandatory for all condominiums – commercial and residential – to have a fidelity bond. Corporations that do not currently have this coverage will be required to purchase at the next renewal of their current policy..
So what is a “Fidelity Bond” and why are they necessary? A fidelity bond generally forms part of the crime coverage on a package policy (a package policy provides many different coverages, including property and general liability). The purpose of the bond is to protect the Insured should there be a theft of monies and/or securities in the control of the insured.
Nonprofit organizations tend to be at a greater risk for theft. The level of controls in place tends to be not as stringent as profit companies. Oftentimes, the misappropriation of funds starts out small, and increases as the person becomes more comfortable in their deception.They may act alone or in conjunction with another employee/volunteer or suppliers. The theft could take many forms:
- Cash payments received and not recorded (and no receipt is supplied),
- Providing a false work order and issuing payments to a non-existent company,
- Submitting invoices for work not done, etc.
- Unauthorized transfer of funds from Corporation’s account
- Condominium Boards have a fiduciary responsibility to the Owners. They are collecting funds on behalf of all the owners and are in a position of trust.
What steps can Boards take to prevent theft? Boards should adopt financial control practices to protect the Corporation’s assets. Some guidelines to follow include:
- Ensure the person responsible for making the deposits does not issue cheques or reconcile the bank accounts. No one person should be in control of every aspect.
- All cheques should require 2 signatures with proper back-up documentation reviewed before signing.
- No cheques should be “pre signed”.
- Have annual financial audits for a third party oversight.
Doing all of the above will not always provide you with 100% protection. Someone that is determined to have unauthorized use of the money will find a way to do so. When a loss of funds is discovered, this is where the Crime Coverage/Fidelity Bond would respond. It covers such things as forgery, alteration, counterfeiting, as well as the theft. Many crime policies also provide coverage for losses due to social engineering. An example of social engineering is when a 3rd party impersonates a trusted vendor and induces (usually via email) the insured to send funds owing to a new bank account. Grant MacEwan University was a victim of this in 2017, and although they recovered the bulk of the funds illegally transferred they still suffered almost a million dollar loss.
So how much coverage is required?
As per Section 62.5(3) in the new Condominium Regulation of Alberta, the minimum amount of required coverage is either
- The amount, if any, set or determined in accordance with criteria set for this purpose by the Corporation in its bylaws, or
- The sum of the Reserve Fund balance at the start of the corporation’s current fiscal year, and the balance of the operating account at the beginning of the corporation’s current fiscal year, if no amount or criteria are set in the corporation’s bylaws.
As indicated earlier, most package policies have a crime component that includes a fidelity bond. These may range anywhere from $10,000 to $1,000,000. It is important that you review your policy to determine your present coverage. Then you must determine what your requirements are as per the formula above or as set in your bylaws. If your coverage is not adequate, you need to contact your corporation’s insurance broker and have the limit increased. You may be required to complete an application and provide a copy of your latest audited financial statement. Finally, you must ask if the definition of the “Insured” on the fidelity bond has been amended to include Directors and Officers as most policies exclude them from coverage.
This coverage is to be reviewed at least once every two (2) years and adjusted – if necessary – to meet the requirements of the Regulation. Should you have incurred a large influx of monies due to a special levy you may want to adjust your limits accordingly before waiting for the two year period to expire.
A Condominium can do everything “right” and still suffer a theft of monies. Having the proper coverage in place to protect the Condominium will not only alleviate the stress of a loss, it will be mandatory as of January 1, 2020.