The Fidelity Law Journal

published by

The Fidelity Law Association

December 2011

Editors-in-Chief Michael Keeley Martha L. Perkins

Associate Editor J. Will Eidson

Cite as XVII Fid. L.J., 2d ed., ___ (2011)

WWW.FIDELITYLAW.ORG THE FIDELITY LAW ASSOCIATION

President Tracey Santor, Travelers

Vice President Michael Retelle, CUMIS

Secretary Dolores Parr, Zurich

Treasurer Robert Olausen, Insurance Services Office, Inc.

Executive Committee Lawrence R. Fish, The Hartford Ronald G. Mund, Travelers Joseph Szary, Chubb

Advisors Samuel J. Arena, Jr., Stradley, Ronon, Stevens & Young, LLP Michael Davisson, Sedgwick, Detert, Moran & Arnold Michael Keeley, Strasburger & Price, LLP Martha L. Perkins, Whiteford, Taylor & Preston, LLP

Advisors Emeritus Bernard L. Balkin, Gilliland & Hayes, PC Robert Briganti, Belle Mead Claims Service, Inc. Harvey C. Koch, Montgomery Barnett, LLP Armen Shahinian, Wolff & Samson PC

FLA Journal Editors-in-Chief Michael Keeley, Strasburger & Price, LLP Martha L. Perkins, Whiteford, Taylor & Preston, LLP

The Fidelity Law Journal is published annually. Additional copies may be purchased by writing to: The Fidelity Law Association, c/o Wolff & Samson PC, One Boland Drive, West Orange, New Jersey 07052. The opinions and views expressed in the articles in this Journal are solely of the authors and do not necessarily reflect the views of the Fidelity Law Association or its members, nor of the authors’ firms or companies. Publication should not be deemed an endorsement by the Fidelity Law Association or its members, or the authors’ firms or companies, of any views or positions contained herein. The articles herein are for general informational purposes only. None of the information in the articles constitutes legal advice, nor is it intended to create any attorney-client relationship between the reader and any of the authors. The reader should not act or rely upon the information in this Journal concerning the meaning, interpretation, or effect of any particular contractual language or the resolution of any particular demand, claim, or suit without seeking the advice of your own attorney. The information in this Journal does not amend, or otherwise affect, the terms, conditions or coverages of any insurance policy or bond issued by any of the authors’ companies or any other insurance company. The information in this Journal is not a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Coverage depends upon the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law. Copyright © 2011 Fidelity Law Association. All rights reserved. Printed in the USA. For additional information concerning the Fidelity Law Association or the Journal, please visit our website at http://www.fidelitylaw.org.

WWW.FIDELITYLAW.ORG COVERAGE FOR LOSSES RESULTING FROM ASSOCIATION PROPERTY MANAGER DISHONESTY

Martha L. Perkins Robert K. Grennan

I. INTRODUCTION

During the past several years of economic downturn, high unemployment, and credit crisis, the increased reports of losses suffered through fraud and embezzlement in the corporate world and in government have scandalized the country. As more and more fraudulent activity involving misappropriation of assets is unearthed, government regulators and consumers seek protection through various instruments, including commercial crime policies. Recent high-profile cases involving condominium association and homeowner association property managers embezzling from the associations that they are retained to manage1 have directed bright spotlights on fidelity bond requirements for

1 See Community Associations Network Association Problems— Embezzlement and Fraud, available at http://www.community associations.net/problems_embezzlement.html (last visited Sept. 1, 2011). The manager of eleven Wisconsin condominium associations was sentenced to two years in prison for stealing more than $140,000 from the associations she had contracted to manage through the ill-named Prestige Property Management Company. A manager of community associations in Georgia garners three years’ probation for fraud after plundering the bank accounts of the community associations to finance Internet shopping sprees. In Virginia, a forensic accountant reviewing the records of Koger Management Company determined that the property manager’s fraud upon the associations it was retained to manage was in excess of $2 million. In New Jersey, a mother-daughter

Martha L. Perkins is a partner in the law firm of Whiteford, Taylor & Preston LLP in Washington, D.C. Robert K. Grennan is a Senior Claim Counsel with Hanover Insurance Company in Worcester, Massachusetts. The authors gratefully acknowledge the research and assistance of William H. Gourley, III, an associate at Whiteford, Taylor & Preston LLP.

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both community associations and property management companies for losses resulting from the dishonesty or theft of property managers.

Over sixty-two million Americans across the country live in more than 300,000 community associations. Common-interest communities—including homeowner associations, condominium associations, and cooperatives—are home to more than one in five Americans.2 Considering the cost of home ownership, the implosion of the subprime mortgage market and, in general, the struggling United States economy, it seems likely that the percentage of the population living in such associations will increase. A number of states have enacted laws to regulate those who manage associations, including various fidelity bond requirements; and more such legislation will be enacted in the next several years.

Property management companies that manage condominium and homeowner associations are increasingly required, by statutes, regulations, and association demand, to obtain fidelity bonds or commercial crime policies to protect associations from theft or dishonesty by the property manager. In addition, community associations themselves are increasingly required to obtain fidelity bonds or commercial crime policies to protect the association funds from losses caused by the theft or dishonesty of, among others, the property manager. Accordingly, fidelity insurers need to understand the world of common- interest communities, the statutory and regulatory authority for such bonds, and the intended scope of coverage for such bonds.

This article first provides a brief primer on common-interest communities, the governance of community associations, and the role of property managers in association governance. The article then examines the statutory and regulatory authority requiring coverage for losses to

management team was indicted by a grand jury on charges they bilked more than $1 million from the condominium association they had contracted to manage. In New Jersey, a former condominium association manager was sentenced in superior court to five years for stealing at least $200,000 from the association he was retained to manage. Id. 2 See Community Associations Institute website at http://www. caionline.org (last visited July 27, 2011).

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associations resulting from association property manager theft or dishonesty.3 The article then examines coverage for losses of association funds resulting from dishonesty or theft by association property managers under fidelity policies obtained by property management companies, and by the associations. Finally, the article discusses relevant case law concerning various issues involving fidelity bonds or policies that provide coverage for losses resulting from property manager dishonesty.

II. COMMUNITY ASSOCIATIONS AND THE ROLE OF PROPERTY MANAGERS

A. Common-Interest Communities

Existing in their current form for only about thirty years, common-interest communities are still a relatively new and evolving form of real estate ownership. Common-interest communities range in size from two-unit condominiums to a town-sized master plan community. Common-interest communities can take a variety of forms and are called by a variety of names, varying throughout the country. The term “condominium” refers to a form of ownership in which the buyer owns a unit with an additional property ownership interest in the development’s common property.4 A “cooperative” is technically not a common interest community although it is often treated as such. A corporation owns all real estate in the cooperative community, and the corporation issues stocks and proprietary leases to its participants. Accordingly, cooperative homeowners are really stockholder tenants of the cooperative corporation.5 Among other types of common-interest communities are planned unit developments and subdivisions.6

3 See Appendix A for a chart of state fidelity coverage requirements for losses resulting from the dishonesty of association property managers. 4 Wayne S. Hyatt, Condominium and Homeowner Association Practice: Community Association law (Ali-Aba 3d ed. 2000) 5 Id. at 14. 6 Id. at 14-15.

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B. Community Association Functions and Powers

The term “community association” is increasingly used as a generic term that includes all forms of housing that require a mandatory membership association.7 The community association acts on behalf of its members to operate and manage the common property, and is governed by a set of documents, denominated governing documents,8 and applicable state statutory provisions. There are essentially two types of community associations.9 Depending on the legal structure, the association may be either a condominium association or a homeowners association. A condominium association is the mandatory membership organization charged in the condominium documentation with operating and administering the condominium. The association does not own the common property, but has powers with regard to it. A homeowners association holds title to the common property, and the individual owner has a membership interest in the association. Each homeowner association member has an indirect ownership interest in the property through the association and retains a direct ownership interest in his or her property or unit.10

It is the association’s function to guide, manage, and administer commonly owned property, whether that property is owned by the association itself, or in common by the unit owners. The association has powers to enact rules and operate its affairs. It has the power to enforce provisions regulating conduct within the jurisdiction of the community and the power to raise and expend funds.11

7 Id. at 7-8, 19. 8 The governing documents in a community association generally include articles of incorporation, a declaration, bylaws, architectural guidelines, rules and regulations promulgated by the board of directors, and board resolutions. Id. at 25. 9 Hereafter, the terms “community association” and “association” refer to all kinds of associations of property owners in a community. 10 Id. at 20-21. 11 Id. at 41-42.

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C. Community Association Governance

The board of directors12 of an association has powers and duties to accomplish many tasks for the benefit of the association. The board members are elected by, and from, the membership of the association. The board of directors is responsible for establishing policy and supervising the implementation of that policy. The powers and duties of the board are set forth in the governing documents.13 These powers and duties enumerated in the bylaws are broad and typically include, but are not limited to, the following:

· Preparing and adopting an annual budget; · Making assessments to defray the common expenses; · Providing for the operation, care, upkeep, and maintenance of common areas; · Collecting assessments and depositing them in a bank depository; · Making and amending rules and regulations; · Opening bank accounts on behalf of the association and designating the signatories required; · Making and contracting for repairs, additions, and improvements to the common areas; · Enforcing by legal means the declaration, bylaws, and the rules and regulations; · Obtaining and carrying the required and necessary insurance; · Paying the costs of all services to the association or its members and not chargeable to the owners; · Keeping books with detailed accounts of the receipts and expenditures affecting the association and its administration; and · Contracting with any person for the performance of various duties and functions. The board has the

12 It should be noted that in different states, and sometimes by choice, the board’s title may be “board of managers,” “board of trustees,” or some other term. The duties and applicable principles, however, remain the same. Id. at 81. 13 Id. at 80-81.

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power to enter into common management agreements. Any and all functions of the association are transferable by the board, in whole or in part, to any other entity.14

As discussed below, boards usually delegate most of these duties to the property manager through a written management agreement. This management agreement is significant in the context of the association’s fidelity coverage for losses resulting from the property manager’s theft or dishonesty. Such coverage is frequently limited to theft of the association’s funds that occurs while the property manager is performing management services for the association that are enumerated in the management agreement.15

D. Community Association Property Managers’ Responsibilities

An association typically hires a professional manager to assist the board of directors in performing the duties necessary to manage the affairs of the association. An association may hire either an individual manager as an employee of the association, or a management company on a contractual basis to provide the services necessary to manage the affairs of the association. In either event, the manager is an agent of the association and is responsible to the association for fulfilling the obligations contained in the agreement between the association and the manager.

Association boards and property managers are charged with keeping up the common areas of the community and managing the budget. The community association manager administers financial, administrative, maintenance, or other duties for the community association, including collecting, controlling, or disbursing funds to the association. Their budgets are funded through money that owners pay for maintenance and assessments, often totaling many millions of dollars. Property managers have the trust and checkbook of the association. Accordingly, condominium associations and homeowner associations are easy targets for embezzlement and theft by unscrupulous property managers.

14 Id. at 81-83. 15 See infra, Section IV.

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Generally speaking, fidelity bonds do not provide coverage for losses resulting from an insured’s liability to a third party.16 Unless expressly authorized by statute or unless the policy provides for a claim by a third party, when a third party seeks to recover its loss from an insured’s fidelity carrier, that third party is generally prohibited from pursuing such a claim under the language of the bond. Therefore, fidelity coverage under the association’s policy for losses to the association is outside the usual fidelity coverage paradigm. Similarly, coverage under a property management company’s fidelity policy for losses to an association resulting from the dishonesty of a property manager is also outside the usual fidelity coverage paradigm. As will be discussed below, however, certain endorsements to fidelity bonds and policies provide for coverage for losses to an association resulting from the theft or dishonesty of a third party—the association property manager.

III. REQUIREMENTS FOR FIDELITY COVERAGE FOR ASSOCIATIONS’ PROPERTY MANAGERS

A. Requirements for Bonds in Associations’ Governing Documents and Management Agreements

Authority for associations to obtain and maintain fidelity insurance might be provided in one or more of the association’s governing documents—declaration, articles, or bylaws. If a governing document requires crime coverage to be obtained, it might state how much coverage is required. The language in governing documents requiring a fidelity bond is often vague. For instance, language in one set of bylaws of a condominium, recorded in 1987, provides as follows:

Fidelity Bonds

The Board of Directors shall require that any officer, agent or employee of the Council handling or responsible for Council funds furnish an adequate

16 Scott L. Schmookler & Pat Duffy, Compensability of Third Party Losses, in COMMERCIAL CRIME POLICY 238 (Randall I. Marmor & John J. Tomaine eds., 2d ed. 2005).

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fidelity bond. The premium on such bonds shall be paid by the Council. The amount of each bond shall be determined by the Board of Directors.17

This cited language requires that the board of directors of the association mandate that any agent “handling or responsible for [the association’s] funds” must furnish a fidelity bond.18 While not specifically named, a property manager would certainly be in the class of agents who handle association funds.

Another set of condominium bylaws, recorded in 1981, provides for fidelity bonds as follows:

Fidelity Bond. The Board of Directors shall require that all officers, directors and employees of the Council of Unit Owners regularly handling or otherwise responsible for the funds of the Council of Unit Owners shall furnish adequate fidelity bonds or equivalent insurance against acts of dishonesty . . . .19

. . . .

The Board of Directors shall maintain adequate fidelity coverage to protect against dishonest acts on the part of officers and directors of the Council of Unit Owners, trustees for the Council of Unit Owners and such employees and agents of the Council of Unit Owners who handle or are responsible for the handling of funds of the Council of Unit Owners.20

17 Scarlett Place Residential Condominium By-Laws, Art. IV, § 13, recorded among the Land Records of Baltimore City, Md., at book 1560, p. 0583. 18 Id. 19 Council of Unit Owners of Georgetowne Park Condominium By- Laws, Art. VI, § 16, recorded among the Land Records of Montgomery County, Md., at book 5820, p. 0473. 20 Council of Unit Owners of Georgetowne Park Condominium By- Laws, Art. XII, § 1(e), recorded among the Land Records of Montgomery County, Md., at book 5820, p. 0488.

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In yet other condominium’s bylaws, more recently recorded in 2007, the fidelity mandate is more specifically delineated, as follows:

Fidelity Insurance. To the extent reasonably available, blanket fidelity insurance shall be required to be maintained by the Board of Directors for all officers, directors, managers, trustees, employees and volunteers of the Association and all other persons handling or responsible for funds held or administered by the Association, whether or not they receive compensation for their services. Where the Board of Directors has delegated some or all of the responsibility for the handling of funds to a managing agent, such managing agent shall be covered by its own fidelity insurance policy which must provide the same coverage as fidelity insurance maintained by the Board of Directors. . . . Fidelity insurance obtained by a managing agent shall name the Association as an additional insured. The total amount of fidelity coverage required shall be sufficient to cover the maximum funds (including reserve funds) that will be in the custody of the Association or managing agent at any time while the fidelity insurance policy is in force, but must at least equal the sum of three (3) months aggregate assessment on all Units within the Condominium plus any reserves. Fidelity insurance policies shall contain waivers by the insurers of all defenses based upon the exclusion of persons serving without compensation from the definition of “employees”, or similar terms or expressions.21

Of course, the management agreement entered into between the association and the management company often sets forth the specific fidelity requirements, providing that the management company must obtain and maintain a fidelity policy naming the association as an insured. In one management agreement between an association and its management company, with which the authors are familiar, the bond

21 Bylaws of the Council of Unit Owners of Tribeca at Camp Springs, a Residential Condominium, Art. 3, § 4, recorded among the Land Records of Prince George’s County, Md., at book 28754.

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provides as follows: “The Agent’s Employees who handle or are responsible for the handling of the Association monies shall, without expense to the Association, be insured by fidelity insurance of not less than One Million Dollars ($1,000,000).”22

The fidelity bond often must be in the amount of the maximum funds that will be in the custody of the Association or its property manager at any one time. This is not necessarily a number that is easily determined. Wise association governance dictates that an association should consider fidelity coverage for all persons who handle association funds, even if the governing documents—or state statutes or regulations—do not require it. The term “persons who control or disburse funds of the Association” includes, but is not limited to, those individuals authorized to sign checks and the president, secretary, and treasurer of the association. Of course, the association’s property manager is a main handler of association funds. The policy not only protects the association funds but also fulfills a bank requirement that many lending institutions have initiated that require a fidelity policy before they will consider funding the loan.

B. State Statutory and Regulatory Requirements for Fidelity Bonds for Associations and Managers

A legislative trend the past few years has been to require association property management companies to obtain a fidelity bond to cover losses to the association resulting from dishonesty of the property manager.23 In addition, more and more state statutes are requiring that associations’ crime coverage provide additional insured status to the association’s property management company. Recently, a number of states have enacted legislation mandating that either the association itself, or the property management company providing services to the association, or both, obtain and maintain fidelity policies that provide coverage for losses to the association resulting from the property manager’s theft or dishonesty. Below is a summary of selected state statutes and regulations that require fidelity coverage for losses to associations resulting from the theft or dishonesty of a property manager.

22 On file with Martha Perkins. 23 See Appendix A for a summary chart of fidelity bond requirements by state.

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1. Alaska

In Alaska, a real estate broker license is required in order to provide community association management services.24 Section 08.88.173 of the Alaska Statutes requires that community association managers obtain a fidelity bond.25 The bond may be in the name of the broker with the association as an additional insured or in the name of the association with the broker as an additional insured.26 The bond must be in the amount of the maximum funds that will be in the control of the association manager at any time that the bond is in force.27

Interestingly, the law provides for limits on an association manager’s authority over the association’s funds. The manager cannot exercise control over reserves or investment accounts of an association, or an operating account of an association, unless allowed under a contract approved by the association’s board of directors and duplicate financial statements about the account are sent by the institution holding the account to the manager and to the board of directors at separate addresses.28 This latter statutory measure is an effective fraud risk mitigation device.

2. Colorado

A Colorado statute provides that, if an association’s employee controls or disburses funds of a common-interest community, the association must obtain and maintain, to the extent reasonably available, fidelity insurance.29 Coverage cannot be less than two months’ current assessments plus reserves.30 In addition, any person employed as a manager of a common-interest community must obtain and maintain fidelity insurance in an amount not less than two months’ current assessments plus reserves, unless the association names such person as

24 Alaska Stat. § 08.88.161(5) & (6) (1998). 25 Id. at § 08.88.173. 26 Id. 27 ALASKA STAT. § 08.88.173(a). 28 Id. at § 08.88.175(1) & (2). 29 COLO. REV. STAT. § 38-33.3-313(10) (1992). 30 Id.

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an insured employee in the association’s fidelity policy.31 Colorado’s fidelity requirement is one or the other; either the association or property manager must obtain such coverage, but not both. However, the statute further provides that the association may obtain fidelity insurance in an amount greater than that required in the statute and may require the manager to obtain more fidelity coverage than required in the statute.32

3. Florida

The Florida Condominium Act provides that an association must maintain a fidelity policy or bond on all persons who control or disburse funds of the association.33 The policy or bond must be in the amount of the maximum funds that will be in the custody of the association or its management agent at any one time. The term “persons who control or disburse funds of the association” includes, but is not limited to, those persons authorized to sign checks on behalf of the association, and the president, secretary, and treasurer of the association.34

4. Hawaii

Hawaii’s condominium law, commonly known as the Condominium Property Regime, provides that each condominium association must obtain a fidelity bond in an amount equal to $500 multiplied by the number of units, to cover all officers, directors, employees, and managing agents of the association who handle, control, or have custody of association funds.35 The amount of the bond cannot be less than $20,000, or greater than $100,000. The fidelity bond shall “protect the association against “fraudulent or dishonest acts by persons, including any managing agent, who have access to the funds of the association.”36

31 Id. at § 38-33.3-313(11). 32 Id. at § 38-33.3-313(12). 33 FLA. STAT. § 718.111(11)(h) (2010). 34 Id. at § 718.111(11)(h). 35 HAW. REV. STAT. § 514A-95.1(a)(1) (2009). Hawaii was the first state, in 1961, to adopt a condominium law. 36 Id.

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5. Illinois

The Illinois Condominium Property Act requires both community associations and their management companies to obtain and maintain fidelity bonds.37 The association must obtain and maintain a fidelity bond that covers persons, including the managing agent and its employees who control and disburse association funds for the maximum amount of coverage available to protect funds in the custody or control of the association, plus the association reserve fund.38 In addition, all management companies that are responsible for funds held or administered by an association must obtain a fidelity bond for the maximum amount of coverage available to protect those funds. The statute specifically provides that the “association has standing to make a loss claim under the bond of the managing agent as a party covered under the bond.”39

6. Louisiana

On June 21, 2011, Governor Jindal of Louisiana signed a new law40 that requires condominium associations or management companies that represent these associations to obtain and maintain a fidelity bond with a minimum of $10,000 coverage, or the lesser of $1,000,000 or the amount of reserve balances of the association, plus one-fourth of the aggregate annual assessment of the association. The “blanket fidelity bond” shall cover “the officers, directors, and persons employed by the unit owners’ association and any managing agent and employees of the managing agent.”41 The new law further provides that the association is in compliance with the law if the association’s managing agent maintains its own bond—and the managing agent’s bond complies with the law’s requirements and the association is named as an additional insured.42 Accordingly, the fidelity bond requirement to protect the association’s funds under Louisiana law is either/or: either the association maintains the coverage or the managing agent maintains the coverage.

37 765 ILL. COMP. STAT. § 605/12(a)(3) (2010). 38 Id. at § 605/12(a)(3)(A). 39 Id. at § 605/12(a)(3)(B). 40 LA. REV. STAT. ANN. § 9:1123.113 (2011). 41 Id. at § 9:1123.113.A. 42 Id. at § 9:1123.113.C.

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7. Maryland

In 2006, the Maryland legislature enacted laws that require associations to obtain fidelity insurance.43 The insurance is to indemnify the association for acts or omissions arising from fraud, dishonesty, or criminal acts committed by any officer, director, managing agent, or other employee charged with operation or maintenance of the association who controls or disburses funds, or by any management company employing a management agent charged with the operation or maintenance of the association who controls or disburses funds.44 The amount of the bond is the lesser of three months’ worth of gross annual charges and the total amount held in all investment accounts at the time that the fidelity insurance is issued, or $3,000,000.

8. Nevada

This year Nevada repealed the requirement that community association managers must post a bond (in a form and amount established by regulation).45 The new law requires an association to maintain crime insurance that includes “coverage for dishonest acts by members of the executive board and the officers, employees, agents, directors and volunteers of the association and [that] extends coverage to any business entity that acts as the community manager of the association and the employees of that entity.”46 The statute further provides that the crime insurance may not contain a conviction requirement, and that the minimum amount of the policy must be not less than an amount equal to three months of aggregate assessments on all units plus reserve funds or $5,000,000, whichever is less.47

43 MD. CODE ANN., REAL PROP. §§ 11-114.1 (2008) & 11B-111.6 (2008). 44 Id. at §§ 11-114.1(b)(2) & 11B-111.6(b)(2). 45 NEV. REV. STAT. § 116A.410 (2011). 46 NEV. REV. STAT. § 116.3113(1)(c) (2011). 47 Id.

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9. Virginia

Denominated the Koger Law,48 a Virginia statute requires a “common interest community manager” to obtain a fidelity bond or an employee dishonesty insurance policy as a condition of licensure.49 Given the history underlying the statute’s nickname, and the intent to protect association funds from managers’ dishonesty, the statutory terms mandate is set forth in relatively detailed fashion, as follows:

It shall be a condition of the issuance or renewal of the license of a common interest community manager that the common interest community manager shall obtain and maintain a blanket fidelity bond or employee dishonesty insurance policy insuring the common interest community manager against losses resulting from theft or dishonesty committed by the officers, directors, and persons employed by the common interest community manager. Such bond or insurance policy shall include coverage for losses of clients of the common interest community manager resulting from theft or dishonesty committed by the officers, directors, and persons employed by the common interest community manager. Such bond or insurance policy shall provide coverage in an amount equal to the lesser of $2 million or the highest aggregate amount of the operating and reserve balances of all associations under the control of the common interest community manager

48 The legislation in Virginia requiring both the community association and the management company to have fidelity coverage to protect association funds from losses resulting from the theft or dishonesty of the property manager was the lawmakers’ direct response to the infamous Koger embezzlement scheme. See Section V.A., below. 49 VA. CODE ANN. § 54.1-2346(D) (2008). Other states that require licensure of association managers include the following: Alaska (ALASKA ADMIN. CODE tit. 8, § 88.161(5) & (6) (2011)); Connecticut (CONN. GEN. STAT. § 20-450-62 (1991)); District of Columbia (D.C. CODE § 47-2853.141-143 (1999)); Florida (FLA. STAT. § 468.431-438) (2008)); Georgia (GA. CODE ANN. § 40-4.2); Illinois (225 ILL. COMP. STAT. 427/1 (2009)); Nevada (NEV. REV. STAT. § 116A.400 (2009)).

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during the prior fiscal year. The minimum coverage amount shall be $10,000.50

In addition, Virginia imposes the requirement on any association collecting assessments for common expenses.51 The bond or policy insures the association against losses resulting from theft or dishonesty committed by officers, directors, or persons employed by the association or committed by any association manager or employees of the manager. The bond or policy must provide coverage in any amount equal to the lesser of $1,000,000, or the amount of reserve balances of the association, plus one-fourth of the aggregate annual assessment of the association.52

During the past several years other states have introduced, but failed to enact, legislation to require associations and/or property management companies to obtain fidelity bonds that would provide coverage to associations for losses resulting from the dishonesty of the manager. And, other states have introduced and failed to enact legislation to revise the current fidelity bond requirements. Those states include, but are not limited to, California,53 New Jersey, and North Carolina.54

50 VA. CODE ANN. § 54.1-2346(D) (2008). The law additionally provides that the licensed management company must certify, among other things, that it has established internal controls to manage the risk of fraud, and that its records are independently audited on an annual basis. Id. at § 54.1- 2346(E). 51 Id. at § 55-79.81(B). 52 Id. 53 California A.B. 805 was introduced in the State Assembly on February 17, 2011. If enacted, the legislation would comprehensively revise and recodify the Davis-Stirling Common Interest Development Act (“Act”). Among the proposed changes to the Act is a requirement that the managing agent of a common-interest community maintain association funds in a separate account from the managing agent’s own money, or from the money belonging to others. The bill further provides that the managing agent may commingle the funds of an association if the managing agent commingled the funds of various associations on or before February 26, 1990, and has obtained a written agreement with the board of each association that the managing agent will maintain a fidelity and surety bond in amount that provides adequate protection

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C. Federal Housing Administration Requires Associations and Managers to Obtain Fidelity Insurance

In order to, among other things, help safeguard the financial well-being of homeowner and condominium associations, the Federal Housing Administration55 has mandated that associations seeking to obtain or maintain condominium project approval must obtain fidelity insurance for management companies in order to protect association assets. In addition, if the association engages the services of a management company, the association must require the management company to obtain and maintain its own fidelity insurance. On June 30, 2011, the FHA released Mortgagee Letter 2011-2256 and the Condominium Project Approval and Processing Guide.57 Among other insurance requirements, condominium projects must be covered by

to the association, as agreed upon by the managing agent and the board of each association. 54 North Carolina H.B. 373 is a carryover bill to 2012, which would require community association managers to be licensed and to obtain a fidelity bond. The fidelity bond would have to be in the amount of at least $20,000, and would cover the community association manager and all, or a portion of, the employees and protect all or a portion of the community association funds in the custody of the manager or the employees acting under the manager’s supervision. The bill would further require the following: (1) the bond would have to be written by an insurance company authorized to write fidelity bonds in North Carolina; (2) the bond would have to cover the community association manager and protect the community association funds in the custody of the manager; and (3) the bond would have to provide that the insurance company could not cancel the bond without thirty days’ written notice, except in the case of nonpayment of premium, in which case the insurer could cancel with ten days’ written notice. In addition, the bill provides safeguards for association funds, including a requirement that funds of each association would have to be segregated into separate accounts. 55 Hereinafter FHA. 56 Hereinafter ML. 57 U.S. Dept. of Housing and Urban Dev., www.hud.gov/offices/adm/ hudclips/letter/mortgagee/files/11-22mlguide.pdf [hereinafter Guide].

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“Fidelity Bond/Fidelity Insurance.”58 The Guide requirement provides as follows:

For all new and established projects with more than 20 units, the homeowners association is required to obtain and maintain this insurance;

· The homeowners association must maintain this insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association;

· The coverage must be no less than a sum equal to three months aggregate assessments on all units plus reserve funds unless State law mandates a maximum dollar amount of required coverage.

If the homeowners association engages the services of a management company, the homeowners association must require the management company to maintain this insurance coverage for all its officers, employees and agents handling or responsible for funds of, or administered on behalf of, the owners association. The required coverage must meet the following requirements:

· Must name the owners [sic] association as an obligee;

· Must be in an amount not less than the estimated maximum of funds, including reserve funds, in the custody of the owners association or management agent at any given time during the term of each bond;

58 Id. at 34. The Guide states that fidelity insurance “may also be known as “Employee Dishonesty’ or ‘Crime Policy.’”

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· In no event may the aggregate amount of such bonds be less than a sum equal to 3 months aggregate assessments on all units plus reserve funds unless State law requires a maximum amount of required coverage.59

These fidelity-insurance mandates suggest that both the association and the management company that has contracted with the association must obtain and maintain fidelity policies to protect an association’s funds. In the Condominium Project Approval Checklist, that suggestion is clarified: the Guide states that the management company’s fidelity insurance “does not replace HOA [homeowners association] required coverage.”60 Thus, the fidelity policy requirement is incumbent on both the association and the management company.

D. Fannie Mae Requires Fidelity Coverage to Protect Association Funds

In its recently published Selling Guide: Fannie Mae Single Family,61 the Federal National Mortgage Association,62 commonly known as Fannie Mae, set forth its fidelity insurance requirements for planned unit developments, condominiums, and cooperative projects.63 In clear and lucid language, Fannie Mae sets forth the projects that require fidelity insurance, who should be covered, the amount of coverage, and the cancellation/modification requirements. Fannie Mae requires fidelity insurance for all condominiums and co-operative projects, new and established, consisting of more than twenty units. In

59 Id. at 34-35. 60 Id. at 80. 61 Selling Guide (July 26, 2011), http://www.efanniemae.com/sf/ guides/ssg/ [hereinafter Selling Guide]. 62 The Fannie Mae website provides an overview of its “mission to increase the amount of funds available in order to make homeownership and rental housing more available and affordable. . . . Fannie Mae operates in the U.S. secondary mortgage market.” Rather than making home loans directly to consumers, Fannie Mae works with “mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates.” Foreclosure Prevention and Mortgage Assistance | Fannie Mae, http://www.fanniemae.com (last visited Aug. 6, 2011). 63 Selling Guide, B7-4-02, Fidelity Insurance (10/30/2009), pp. 891-93.

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states that have statutory fidelity insurance requirements, Fannie Mae will accept those requirements in lieu of its own. The lender must verify coverage as part of its review of the project.64

The association must have blanket fidelity coverage for anyone who handles, or is responsible for, funds that it holds or administers. The policy must name the association as the insured. A management agent that handles funds for the association must be covered by its own fidelity policy, which must provide the same coverage required of the association.65

The policy must cover the maximum funds that are in the custody of the association or its management agent at any time while the policy is in force. A lesser amount of coverage is permitted if the legal documents require the association and the management company to comply with one or more of the following financial controls:

· Separate bank accounts are maintained for the working account and the reserve account, each with appropriate access controls, and the bank in which funds are deposited sends copies of the monthly bank statements directly to the association.

· The management company maintains separate records and bank accounts for each association that uses its services, and the management company does not have the authority to draw checks on, or transfer funds from, the association’s reserve account.

· Two members of the board of directors must sign any checks written on the reserve account.

Even with one or more of the finance controls in place, the fidelity coverage must equal at least the sum of three months’ assessments on all units in the project.66 Indeed, the financial controls listed by Fannie Mae

64 Id. at 891. 65 Id. 66 Id. at 892.

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are excellent internal controls that fidelity insurers should consider as requirements for issuing policies that provide such coverage.

The Selling Guide provides that the fidelity policy must include a provision for ten days’ written notice to the association before the policy can be canceled or substantially modified for any reason. This same notice must also be given to each servicer that services a Fannie Mae-owned or Fannie Mae-securitized mortgage in the condominium project.67

E. Freddie Mac Requires Fidelity Coverage to Protect Association Funds

The Federal Home Loan Mortgage Corporation, which goes by the moniker of Freddie Mac,68 provides in its Single Family Seller/Servicer Guide69 for fidelity policy requirements similar to those required by Fannie Mae.70 Interestingly, Freddie Mac’s requirements refer to “fidelity or employee dishonesty insurance” rather than Fannie Mae’s “fidelity insurance.” The projects that require insurance, who should be covered, and the amount of coverage are substantially similar to Fannie Mae’s requirements.71 Freddie Mac’s Servicer Guide, however, does not contain a cancelation/modification requirement.

67 Id. at 892-93. 68 Freddie Mac, like Fannie Mae, does not originate loans, but rather conducts business in the U.S. secondary mortgage market. Its mission is to “provide liquidity, stability and affordability to the U.S. housing market.” Freddie Mac, http://www.freddiemac.com (last visited Aug. 6, 2011). 69 Freddie Mac, http://www.freddiemac.com/sell/guide/# (last visited Aug. 6, 2011) [hereinafter Servicer Guide]. 70 Servicer Guide, Reg. 58.5, Fidelity or employee dishonesty insurance for condominiums (3/1/08). 71 Id.

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IV. LANGUAGE OF POLICIES AND ENDORSEMENTS

A. ISO’s Designated Agents As Employees Endorsement

The Insurance Services Office, Inc.72 Form CR 25 02 10 10 is a Designated Agents As Employees Endorsement that modifies, among other policies, the ISO Commercial Crime Coverage Form and the ISO Commercial Crime Policy.73 The endorsement expressly applies to the Employee Theft Insuring Agreement. ISO Form CR 25 02 10 10 is reprinted as Appendix B to this article.

ISO Form 25 02 10 10 provides as follows:

1. The definition of “employee” is amended to include each natural person, partnership or corporation you appoint in writing to act as your agent in the capacity shown in the schedule while acting on your behalf or while in possession of covered property. These natural persons, partnerships or corporations are not covered for faithful performance of duty even in the event that this insurance may have been amended by endorsement to provide such coverage on other “employees”. Only coverage for “theft” applies to the agents scheduled above.

2. Each such agent and the partners, officers and employees of that agent are considered to be, collectively, one “employee” for the purposes of this insurance. However, the Termination As To Any Employee Condition applies individually to each of them.

3. The most we will pay under this insurance for loss caused by an agent included as an “employee” by this

72 Hereinafter ISO. 73 Designated Agents as Employees Endorsement CR 25 02 10 10 (2009) [hereinafter ISO Form CR 25 02 10 10], reprinted by the kind permission of ISO.

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endorsement is the Limit Of Insurance shown in the Schedule. That Limit Of Insurance is part of, not in addition to, the Limit Of Insurance shown in the Declarations as applicable to the Employee Theft Insuring Agreement.

This endorsement clearly provides that one coverage element is that a person, partnership, or corporation must be appointed in writing to act as the agent in the capacity shown in the schedule and act on the association’s behalf or while in possession of covered property. In addition, Section 1 provides that coverage for “theft” only applies to the agents scheduled in this endorsement; there is expressly no coverage for faithful performance of duty.

Section 2 of the ISO endorsement provides that the Termination As To Any Employee Condition applies individually to each such agent and the partners, officers, and employees of that agent. This section emphasizes that the automatic termination provision of the policy is applicable to any named agent in the schedule.

Section 3 of the ISO endorsement clearly provides that the limit of insurance is part of, and not in addition to, the limit of insurance in the declarations as applicable to the Employee Theft Insuring Agreement.

B. Other Language in Endorsements

A number of insurance companies have issued property managers’ or agents’ endorsements that modify, in various ways, insurance policies and fidelity bonds. The following are two examples.

One such endorsement to a condominium association’s liability insurance policy amends the definition of “Insured” to include the association’s property manager, as follows:

a. any independent management organization under a written contractual agreement solely with the Insured Organization (a “Property Manager”) and

b. any director, officer or employee of a Property Manager

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but only while performing property management services for the Insured Organization which are enumerated in such written contractual agreement.

Clearly, a condition for coverage is the existence of a written management services agreement between the association and the management company. A handshake management agreement will preclude coverage. Another condition is that the loss must have resulted from acts committed by the property manager while performing management services enumerated in the written contract between the association and the management company.

Another company’s endorsement to a condominium association’s liability insurance policy adds to the Employee Theft Insuring Agreement that the schedule includes the “Property Manager while contracted by Insured Organization.” This endorsement further adds, with respect to the Employee Theft Insuring Agreement only, to the definition of “Employee,” as follows:

Employee includes any natural person, partnership, corporation, limited liability corporation or other entity named in the above Schedule and appointed by you in writing to act as your Property Management Agent, while acting on your behalf or while in possession of your Money, Securities or Other Property. Each such agent and the partners, officers and employees of that agent are considered to be, collectively, one Employee for the purposes of this insurance, provided, however, that Section V. CONDITIONS D. CANCELLATION OR TERMINATION Paragraph 4. shall apply individually to each of them.

Interestingly, one endorsement amends the definition of Insured and the other amends the definition of Employee. As ISO Form CR 25 02 10 10, such endorsements generally provide that coverage is only provided under the Employee Theft Insuring Agreement, that the automatic termination provision applies to each person, and that the Single Loss Limit of Insurance is applicable.

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C. Insurance Agents and Statutory Compliance Issues

A letter dated earlier this year from a Maryland insurance agent to a property manager employed by an association management company provided quotations on the insurance program for a Maryland condominium. Specifically concerning the fidelity bond/employee dishonesty coverage, the letter provided as follows:

We will continue to provide $275,000 of Fidelity Bond/Employee Dishonesty insurance that will cover the Association’s funds that are stolen by direct employees, Board members, Committee members, and funds (up to a $275,000 limit) that are under management by . . . Management Company. A $500 deductible will apply to Fidelity Bond/Employee Dishonesty losses. The first $100,000 of Fidelity Bond/Employee Dishonesty coverage will be provided by . . . Insurance Company. The second $175,000 will be provided by . . . Insurance Company.

In order to comply with the [Maryland] Condominium Act requirements, the Fidelity Bond/Employee Dishonesty limit of coverage should equal at least 3 months of assessments plus reserve accounts (or investment accounts) funds.74

This referenced Maryland statutory mandate requires the association to obtain a fidelity bond to protect the association’s funds that are managed by the property management company in a specified amount.75

When an association or property management company is required by statute or regulation to maintain certain levels of fidelity coverage, a discrepancy between the underlying statute and the terms of the bond or policy will likely be construed in favor of the coverage mandated by statute. Unlike fidelity bonds required by an Association’s governing documents, the terms of a bond required by statute or regulation will likely be governed by the statutory or regulatory mandate,

74 On file with Martha Perkins. 75 Md. Code Ann., Real Prop. § 11-114.1 (2008).

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not the language of the bond itself, if there are conflicting terms between the bond and the mandate.

V. CASES INVOLVING LOSSES RESULTING FROM PROPERTY MANAGER DISHONESTY

A. The Koger Case—Rescission Is Alive and Well

One of the most well-known incidents involving a property manager and losses to community associations resulting from his dishonesty was fascinating both for the legal issues involved, and for the bizarre circumstances of the embezzling property manager.

In Koger Management Group, Inc. v. Continental Casualty Co.,76 the United States District Court for the Eastern District of Virginia held that the insurer was entitled to rescind a commercial crime policy based on the insured company’s knowingly false statement on the policy application. The insurer stipulated that, if it were not entitled to rescind the policy, it would pay Koger Management Group77 the policy limit of $1,000,000.78 The insurer issued a crime insurance policy from 2003 to 2007, to KMG, a homeowner’s association management company operating in the District of Columbia, Maryland, Virginia, and West Virginia. As part of its management activities, KMG performed numerous financial activities on behalf of its over 400 homeowner association clients, including maintaining unique bank accounts for each association client. In 2006, KMG discovered that the chief financial officer, Jeffrey Koger, son of the President of KMG, had embezzled over $2 million by electronically transferring funds from client accounts to his personal accounts. In 2007, the company submitted a claim under the crime policy for losses resulting from the embezzlement.79

The insurer responded by seeking to rescind the policy based on alleged misrepresentations in the policy application signed by the company president in 2003. In response to a question regarding whether

76 No. 1:08cv301, 2009 WL 577597 (E.D. Va. Mar. 3, 2009). 77 Hereinafter KMG. 78 Id. at *1. 79 Id. at *2.

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“bank accounts [were] reconciled by someone not authorized to deposit or withdraw therefrom,” the president responded “Yes.” The insurer contended that this response was false because Jeffrey Koger reconciled the account and had authority to deposit or withdraw funds. The insurer, in addition, contended that this false response was material to its decision to issue the policy.80

Applying Virginia law to the facts of the case, the court concluded that the insurer had met the rescission standard because the statement on the application was material, false, and knowingly false when made.81 The embezzlement in the Koger case is one of the typical schemes that dishonest property managers perpetrate on the associations that they are purportedly managing for the benefit of the association.

On the criminal side of the house, Jeffrey Koger pleaded guilty to diverting $3 million dollars from 400 homeowner associations into his own bank accounts using 140 bank wire transfers. Koger was sentenced to serve sixty-six months in prison on a federal conviction for wire fraud and tax evasion. He was also ordered to pay $2 million in restitution. Koger also faces three counts of attempted capital murder of police officers, two counts of aggravated maiming, and five counts of use of a firearm in commission of felonies.

B. Three Garden Village—Definition of “Employee” Is Fact Intensive

In Three Garden Village Ltd. Partnership v. United States Fidelity & Guaranty Co.,82 the central issue was whether a fidelity bond issued to an apartment management company covered embezzlement by the company’s sole stockholder, officer, and director.83 The management company managed apartment complexes and other properties, collecting rent and maintaining and repairing the property (similar to the functions of an association property manager). In that capacity, the company was entrusted with funds belonging to other persons or partners.84 The

80 Id. at *3. 81 Id. at *7. 82 567 A.2d 85 (Md. 1989). 83 Id. 84 Id. at 86.

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fidelity bond at issue provided coverage for losses caused by acts of the management company employees in managing the funds entrusted to them by the client projects.85

After reviewing the relevant facts and an array of case law from around the country, Maryland’s court of last resort opined that, while the sole owner was an employee of the management company “within the ordinary meaning of that term, petitioners have not shown on undisputed, material facts that he was an employee as a matter of law within the policy definition of that term at the time of the losses.”86 The court observed that, where the claimed loss is caused by the dishonesty of a person who is the only officer, director, and shareholder of the insured corporation, the cases are nearly uniform in holding that the standard fidelity bond does not provide coverage. In such cases, the embezzling employee is treated as the alter ego of the insured corporation.87 In the instant matter, however, the court held that a genuine issue of material fact existed as to whether the shareholder was an “employee” of the corporation within the meaning of the bond at the time of the losses and remanded the case to the trial court.88

VI. CONCLUSION

While there are myriad criminal and civil cases involving losses to an association resulting from the dishonesty or theft of association property managers, there is a dearth of reported cases involving fidelity coverage issues for losses resulting from association property manager theft or dishonesty. More statutory and regulatory requirements for such bonds or policies will be enacted in the next few years to require association property management companies and community associations to obtain such fidelity bonds to cover losses to the association caused by the theft or dishonesty of association managers.

The complexity of community association laws and the concerns about liability have resulted in an increasing number of associations

85 Id. at 87. 86 Id. at 92. 87 Id. at 90. 88 Id. at 95.

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retaining the services of property managers. Accordingly, property management firms are enjoying rapid growth. On the other hand, recent failures of some property management companies and allegations of criminal misconduct have brought more regulation to the industry, along with statutory and regulatory fidelity bond requirements. The current poor economic conditions, increased fidelity bond mandates, and heightened general scrutiny of association finances will likely increase the claims against fidelity bonds and policies that provide coverage for losses resulting from the theft or dishonesty of association property managers. Such claims will provide an interesting array of coverage issues for investigation, analysis, and determination.

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APPENDIX A

PROPERTY MANAGER FIDELITY COVERAGE REQUIREMENTS BY STATE

STATE STATUTE/ AMOUNT STATUTE/ AMOUNT REGULATION REGULATION IMPOSING IMPOSING OBLIGATION OBLIGATION ON ON ASSOCIATE MANAGEMENT COMPANY AL None Required None Required AK None Required Alaska Stat. § Must cover 08.88.173 the maximum funds in control of the association manager at any time while the bond is in force. AZ None Required None Required AR None Required None Required CA None Required None Required CO Colo. Rev. Stat. No less in § 38.-33.3- aggregate than 313(10) 2 months’ current assessments plus reserves, as calculated from the current budget of the association.

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CT Conn. Gen. Stat. None Required Conn. Gen. Stat. § Must cover § 47-255(a) 20-460 the maximum funds in the custody of the association manager at any time while the bond is in force, and in no event be less than the sum of 3 months’ assessments plus reserve funds; provided, however, the fidelity bond of a person who is employed full-time by and provides association management services to an association of a common interest community, or to a master association exercising powers on behalf of one or more common interest communities, which

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community or communities were established prior to July 3, 1991, and have more than 2,400 residential units, shall be in an amount not less than one-half the amount specified above. DE None Required None Required DC None Required None Required FL Fla. Stat. § Must cover the None Required 718.111(11)(h) maximum funds in the custody of the association or its management agent at any one time. GA None Required Ga. Comp. R. & Must cover Regs. 520-1-.06(3) the maximum (authorized by Ga. amount of Code Ann. § 43- funds that the 40.22.1 (2011), broker Fidelity bond or providing insurance association requirements for management broker providing services community collects, management controls, or services) disburses at any time the

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bond or insurance policy is in effect, provided that at no time shall coverage be less than an amount equal to the sum of 3 months’ assessments due from all the members of the association(s) managed by the broker plus the amount of reserve funds that the community association(s) requires the broker to maintain. HI Haw. Rev. Stat. Amount equal Haw. Rev. Stat. Amount Ann. § 514A- to $500 Ann. § 514A- equal to $500 95.1(a)(1) multiplied by 95(a)(3) (applies to multiplied by (generally the number of condominium the aggregate applies to apartments; associations created number of condominiums provided that prior to apartments of created on or the amount the after July 1, shall not be association of 2006) less than apartment $20,000 or owners greater than managed by $100,000. the managing agent; provided that

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the amount shall not be less than $20,000 or greater than $100,000. Haw. Rev. Stat. Amount equal Haw. Rev. Stat. Amount Ann. § 514B- to $500 Ann. § 514B- equal to $500 143(a)(3) multiplied by 132(a)(3) (applies multiplied by (generally the number of to condominium the aggregate applies to units; provided associations created number of condominiums that the after units of the created after July amount shall association 1, 2006) not be less managed by than $20,000 the managing or greater than agent; $200,000. provided that the amount shall not be less than $20,000 or greater than $500,000. ID None Required None Required IL 765 Ill. Comp. Maximum 225 Ill. Comp. Stat. Not less than Stat. § 605/12(3) amount of § 427/55 all moneys coverage under the available to control of the protect funds association in the custody manager or or control of the the association employing manager, plus association the association management reserve funds. agency for the association. IN None Required None Required IA None Required None Required

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KS None Required None Required KY None Required None Required LA La. Stat. Ann. § Amount equal None Required 9:1123-113 to the lesser of $1,000,000 or the amount of reserve balances of the unit owners’ association plus one-fourth of the aggregate annual assessment of the unit owners association; minimum coverage amount shall be $10,000. ME None Required None Required MD Md. Code Ann., At least the None Required Prop. Law §11- lesser of: (i) 3 114.1 (applies to months’ worth condominium of gross annual associations) assessments and the total amount held in all investment accounts at the time the fidelity insurance is issued; or (ii) $3,000,000. Md. Code Ann., At least the Prop. Law §11B- lesser of: (i) 3 111.6 (applies to months’ worth homeowner of gross annual

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associations) homeowners association fees and the total amount held in all investment accounts at the time the fidelity insurance is issued; or (ii) $3,000,000. MA Mass. Gen. Amount equal Mass. Gen. Laws. Amount Laws. ch. 183A, to at least one- ch. 183A, § 10(h) equal to at § 10(h) fourth of the least one- annual fourth of the assessments, annual excluding assessments, special excluding assessments. special assessments. MI None Required None Required MN None Required None Required MS None Required None Required MO None Required None Required MT None Required None Required NE None Required None Required NV Nev. Rev. Stat. § Minimum None Required 116.3113(1)(c) amount of (2011) policy must not be less than amount equal to 3 months of aggregate assessments on all units plus reserve funds

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or $5 million, whichever is less NH None Required None Required NJ None Required None Required NM None Required None Required NY None Required None Required NC None Required None Required ND None Required None Required OH None Required None Required OK None Required None Required OR None Required None Required PA None Required None Required RI None Required None Required SC None Required None Required TN None Required None Required TX None Required Amount that None Required However, Tex. the board of Prop. Code Ann. directors § 11-215.005 considers (2011) necessary and authorizes boards appropriate. of directors for master mixed- use property associations to obtain fidelity bonds UT None Required None Required VT Vt. Stat. Ann. tit. None Required None Required 27A, § 3- 113(a)(3) VA Va. Code Ann. § Amount equal Va. Code Ann. § Amount

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55-79.81(B) to the lesser of 54.1-2346(D) equal to the $1,000,000 or lesser of the amount of $2,000,000 or reserve the highest balances of the aggregate unit owners’ amount of the association operating and plus one-fourth reserve of the balances of aggregate all annual associations assessment of under the such unit control of the owners’ community association. manager during the prior fiscal year; minimum coverage amount shall be $10,000. Va. Code Ann. § Amount equal 55-514.2(B) to the lesser of $1,000,000 or the amount of the reserve balances of the association plus one-fourth of the aggregate annual assessment income of such association. WA None Required None Required WV None Required None Required WI None Required None Required WY None Required None Required

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APPENDIX B

POLICY NUMBER: CRIME AND FIDELITY CR 25 02 10 10

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY INCLUDE DESIGNATED AGENTS AS EMPLOYEES

This endorsement modifies insurance provided under the following:

COMMERCIAL CRIME COVERAGE FORM COMMERCIAL CRIME POLICY EMPLOYMENT THEFT AND FORGERY POLICY GOVERNMENT CRIME COVERAGE FORM GOVERNMENT CRIME POLICY GOVERNMENT EMPLOYEE THEFT AND FORGERY POLICY

and applies to the Employee Theft Insurance Agreement:

SCHEDULE

Capacity Of Agent Limit Of Insurance $ Information required to complete this Schedule, if not shown above, will be shown in the Declarations.

1. The definition of “employee” 2. Each such agent and the is amended to include each partners, officers and natural person, partnership or employees of that agent are corporation you appoint in considered to be, collectively, writing to act as your agent in one “employee” for the the capacity shown in the purposes of this insurance. Schedule while acting on your However, the Termination As behalf or while in possession To Any Employee Condition

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of covered property. These applies individually to each of natural persons, partnerships or them. corporations are not covered 3. The most we will pay under for faithful performance of this insurance for loss caused duty, even in the event that this by an agent included as an insurance may have been “employee” by this amended by endorsement to endorsement is the Limit of provide such coverage on other Insurance shown in the “employees”. Only coverage Schedule. That Limit Of for “theft” applies to the agents Insurance is part of, not in scheduled above. addition to, the Limit of Insurance shown in the Declarations as applicable to the Employee Theft Insuring Agreement.

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