FHA Condo Approvals – Employee Dishonesty Insurance
Working with condominium projects, probably the most common item that needs to be addressed prior to submission is the coverage of the Employee Dishonesty/Fidelity Insurance.
For all new and existing projects of 20 or more units, the HOA (not the property management company) must provide a policy that covers employee theft. If there is a property manager, the policy must include coverage of the management company.
In reviewing the certificate of insurance, I look for two main things:
1. Is the coverage sufficient?
2. Does it specifically name the property management company?
The required coverage is easy enough to check. HUD requires that it be at least 3 months aggregate of the common charges plus the amount held in all reserve accounts (not operating accounts).
Thus, for a project with annual common charges of $200,000 and $50,000 in reserves at the time of submission, the minimum coverage of the Employee Dishonesty policy would be $200,000/4 + $50,000 = $100,000 (nice round numbers, right?)
I bolded “at the time of submission” because I once checked this coverage at the time the original bank statements were provided to me. It took over a month to collect the rest of the documents. Because HUD requests bank statements to be no more than 30 days old, I had to collect new bank statements.
In my haste to submit the file, I didn’t re-check the coverage amount against the new bank statements. The HOA had made several deposits into the reserve account and the coverage was no longer sufficient. The file was Rejected for this reason but it was quickly rectified.
If there is a property management company, the Certificate of Insurance must specifically name the company. It is not sufficient for the Certificate to say “includes property manager”. It must say something like “XYZ Management is designated agent” or “XYZ Management is additional insured.”
In Connecticut, it is state law that condominium employee dishonesty coverage includes the property management company but HUD still wants it spelled out on the Certificate.