Crime & Fidelity Insurance: Is Your Money Safe?

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InsuranceWe have all heard the stories or, worse yet, know of a condominium that has been a victim of fraudulent financial activity. Perhaps you are an owner at one of these corporations. In almost all cases, the perpetrator is never a random stranger or cyber criminal from a far flung country taking advantage of some superior hacking prowess.  Overwhelming evidence shows that when it comes to financial fraud committed against condominium corporations, the perpetrators are more often board members and rogue property managers either acting alone or in collusion. Financial fraud can lead to devastating consequences. I am aware of condominium corporations that have been unable to cover their financial obligations, including paying their insurance premiums as a result of fraud.  In many cases the theft goes unnoticed for long periods of time and is discovered by pure chance. Board members can be left to answer tough questions and even be held liable for lack of effective financial oversight and care.

An effective Risk Management strategy has to be the first and foremost starting point when it comes to managing the threat of financial fraud. Insurance should always be considered a part of an effective risk management strategy, not THE risk management strategy. It would be counter productive for example to leave your front door unlocked while on a weeklong vacation simply because you have purchased a Homeowner’s insurance policy. It is also important to note that financial fraud, specifically surrounding loss of money due to criminal activity is addressed differently by the insurance industry. For example, a Homeowner’s insurance policy limits loss of cash to a specific amount; usually no more than $1,000. We have all heard of the grandma who stuffs cash under the mattress.  It is important to understand the limitations of insurance coverage in such circumstances. Similarly, the insurance policies provided to corporations including condominium corporations have limitations specific to loss of hard cash and other financial assets despite the cause.

We will proceed under the assumption that the board has taken all reasonable risk management steps to minimize the chance of financial crime against the corporation. There are various ways to accomplish this, including a policy that requires countersigning of cheques (should we still be using cheques at all?)  and review of all invoices and confirmation that they can be matched to the actual goods and services prior to approving payments. There are minimum industry standards that condominium corporations can implement and a good accountant well versed in condominiums will be your best friend in ensuring your corporation is managing this risk effectively.

The next step in your financial Risk Management strategy, once you have taken all reasonable steps to eliminate or minimize the risk of loss, involves insurance coverage. Theft of cash, securities and related assets is an optional coverage that can be added to your existing policy or purchased ‘standalone ‘under a Fidelity and Crime insurance policy. Many insurers include Crime and Fidelity automatically but with very low limits, usually as low as $5,000 for theft of cash and financial assets by an ‘employee’ and also to cover robbery and theft of hard cash, fraudulent fund transfers, fraudulent cheques and credit card fraud. For a condominium corporation, a board member should qualify for coverage, as would an actual employee of the corporation, but it is important to clarify who is covered with your actual insurer.   This coverage can be expanded to cover much higher amounts, and importantly to include theft by a contracted property manager as they typically do not qualify for coverage under the category of an "employee" due to the fact that most are hired under contract.  Boards should expect to complete applications that focus on your risk management policies and procedures surrounding how your money is managed especially when seeking coverage for high amounts of money. New CMRAO guidelines require condominium property management firms to carry Fidelity insurance in the event an employee manages to pilfer funds from a corporation they have been contracted to manage. Many insurers require a condominium corporation to first legally pursue the management firm if they have been victimized before looking at their own policy for coverage. As is often the case, these instances are usually discovered when it is too late to recover much of the funds, and the property management’s Fidelity insurance may not be sufficient to make whole all the corporations that may have been victimized if the fraud was widespread.  Due to the criminal nature of these losses, insurers typically require the authorities to be involved and the perpetrators charged as well as reasonable evidence of what has been lost presented before coverage is triggered.

It is important to discuss your actual exposures and needs with an accountant in consultation with your insurance broker or agent and other industry professionals to determine the amount of insurance. Some industry professionals recommend using pre-determined formulas to come up with how much insurance to purchase for Fidelity which can be helpful. I like to remind boards that you can effectively reduce the amount of insurance you need to purchase in this area (and the subsequent cost of it) if you can insulate your funds from fraud and theft as much as possible.  As with any insurance policy, claims will result in much more scrutiny by the insurer and increased rates. Condominium corporations that have fallen victim to financial fraud can attest to how stressful and disruptive it can be. In most cases even when the criminals are found, charged and convicted, the funds are never fully recovered.  Insurance can help ensure that cash flow is available to pay the bills and not cripple the corporation.


David Outa 3David Outa BA, CIP, CRM

Condominium Practice Lead, Cowan Insurance Group

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