The California HOA Bond is a new type of fidelity bond requirement, which protects the homeowners in a community from various acts of fidelity, fraud, or theft. California legislation, effective January 1, 2019, is now requiring that every HOA in California be required to obtain an HOA fidelity bond. The HOA, Homeowners Association, is considered a private government within a community of homes that can regulate, tax, and create specific rules for the community and homeowners based on decisions of an elected board. Many communities have an HOA, which means homeowners are paying monthly fees to these board members to help with community projects.
The California homeowner’s association fidelity bond requirements are listed below and require cooperation and honest of the board members to ensure that the bond can be obtained. This bond will protect homeowners from any dishonest activity that may occur with the assets they provide each month due to decisions made by board members and directors of the HOA. The HOA bond is a type of fidelity bond that will protect homeowners from members of the HOA taking funds and not appropriating them accordingly or justly.
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.”
The California HOA Fidelity Bond requirements rely largely on 3 things including: 1) managerial companies/persons, 2) separation of financial duties, and 3) routine CPA/independent accountant input.
Requirement #1: 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 2 different people on the HOA board to perform financial duties. The person who makes the bank deposits, writes checks, or completes bank withdraws cannot be the person who keeps the books and checks the bank statements at the end of each month to ensure that all money going in and out is accommodated for.
Requirement #2: Books submitted annually to CPA or Accountant
When requesting the HOA Bond, the Surety will look to ensure that the HOA applying has an independent outsider checking the books at least once a year. This is important because it ensures that the internal team is not in cahoots to defraud the homeowners in anyway. The new regulation requiring an HOA fidelity bond by all California HOA's is due to the fact that homeowners were being taken advantage of by different HOA boards, paying fees each month but not knowing where their money was really being utilized to better the community grounds.
Requirement #3: Is there an independent management group running the community?
The purpose of the HOA Bond is to ensure limited access to community funds, 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.