What is the California HOA Fidelity Bond?

The California HOA Bond is a new type of fidelity bond requirement, which protects the homeowners in a community from various acts of fraud, or theft. California legislation, effective January 1, 2019, is now requiring that every HOA in California be required to obtain a HOA fidelity bond. The HOA is considered a private government within a community of homes that can regulate, assess, and create specific rules for the community and homeowners based on decisions of an elected board.

The California HOA fidelity bond requirements are listed below and require cooperation of management companies entrusted with the day-to-day operations of the HOA and the elected board members to ensure that the fidelity bond can be obtained. This bond will protect the HOA and homeowners from any dishonest activity that may occur with the assets in the Operating Fund and Replacement Fund of the HOA. The HOA fidelity bond will protect the HOA and its homeowners from the management companies or the directors should funds in either the Operating Fund or Replacement Fund not be disbursed in accordance with applicable law and with policies and procedures adopted by the Board of SCSHCA.

California Civil Code Section 6, 5806, states the following:

“Unless the governing documents require greater coverage amounts, the association shall maintain fidelity bond coverage for its directors, officers, and employees in an amount that is equal to or more than the combined amount of the reserves of the association and total assessments for three months. The  association’s fidelity bond shall also include computer fraud and funds transfer fraud. If the association uses a managing agent or management company, the association’s fidelity bond coverage shall additionally include dishonest acts by that person or entity and its employees.”

In the prior paragraph, the Civil Code refers to the word “reserves”. This word is synonymous with the word Replacement Fund that is utilized by SCSHCA to describe the accumulated financial resources for the major repair and replacement of common area real and personal property components as identified in the most recent Reserve Study. The most recent reserve study approved by the Board of Directors of SCSHCA is dated October 29, 2020 and is referred to as the 2021 Reserve Study.

The California HOA fidelity bond requirements rely largely on three things including: 1) managerial companies/persons, 2) separation of financial duties, and 3) annual CPA audit.

Requirement #1: Is there an independent management group running the community?

The purpose of the HOA fidelity bond is to ensure limited access to the funds in the Operating Fund and the Replacement Fund of the HOA, i.e.: a property manager should not be allowed full access to HOA funds. Underwriters will need to know exactly who all has access to the HOA funds and will require that rules be established for certain parties to protect the members of that specific community. Honesty is crucial when requesting a California HOA Bond.

Requirement #2: Separation of all Financial Responsibilities

Whoever applies for the HOA Bond must be aware of the requirement where specific financial responsibilities must be performed by different people. This is yet another way to protect the homeowners from fraudulent activities. There must be at least two different people on the HOA board to approve invoices for payment. The person who makes the bank deposits, writes checks, or completes bank withdrawals cannot be the person who keeps the books and checks the bank statements at the end of each month to ensure that all funds received and disbursed are accounted for properly in accordance with generally accepted accounting principles.

Requirement #3: Books submitted annually to CPA or Accountant

When requesting the HOA Bond, the Surety will look to ensure that the HOA applying for the fidelity bond has an independent Auditor who issues their report on the annual audited financial statements of the HOA.

The SCSHCA is served by a five-member elected Board of Directors. Day to day management of the operations of the HOA are the responsibility of Desert Resort Management, Inc. (DRM) for all operations other than golf and food and beverage (F&B) operations pursuant to a written management agreement. Day to day management of the golf and F&B operations are the responsibility of Troon Golf, L.L.C. (Troon) pursuant to a written management agreement. DRM and Troon are each responsible for employment of management and staff positions for their respective operations. DRM and Troon are each responsible for the preparation of the accounting and financial reporting for each of their operations. The Controller of SCSHCA is an employee of DRM and is responsible for the preparation of the combining and combined financial statements of SCSHCA. Monthly financial statements and other monthly financial reports are reviewed by the Finance Advisory Committee (FAC) composed of residents appointed by the Board of Directors of SCSHCA to review the financial statements and reports prepared by Troon, DRM, and the Controller and to make a recommendation to the Board of Directors of SCSHCA to accept or not accept the financial statements and financial reports. The Controller, and the Treasurer of the Board and at least one other Board member must approve invoices and payment requests for the disbursement of funds from either the Operating Fund or the Replacement Fund. The financial statements prepared by the Controller, DRM, and Troon are audited annually. The amount of the fidelity bond is computed annually by the FAC and furnished to the Board of Directors for approval.