Risks abound in today's technologically dependent environment, and community associations are a prime target. Has your board taken the necessary steps to protect the association against financial crimes, data breaches, and other business risks?
Community associations should have various types of insurance to protect themselves from risks and potential financial losses. Director's and officer's insurance will safeguard board members if they make errors in judgement, make misleading statements, or commit negligence. Cyber liability insurance covers data breaches, income losses due to the interruption, and forensic support. Worker's compensation insurance is also important for community associations if contractors don't have policies in place and a worker gets hurt on the association's property. Finally, crime and fidelity insurance is essential for HOAs since it protects the association's money against embezzlement, check fraud, padding or false invoices, and computer and wire fraud. Keep reading to learn more about these policies and what risks they can help your association mitigate.
In addition to having the appropriate insurance policies in place, ensuring that best management practices are consistently enforced is equally important. Hiring uninsured workers to save a buck is a sure way to stick your neck out and is not worth doing. On the other hand, partnering with professional service partners is the best way to immunize board members from threats and allow members to rest assured the board is serving the association's best interests.
Directors and Officers Insurance
Directors and officers insurance, also known as D&O insurance, protects individuals and the board itself from wrongful acts they may have committed while performing their duties as directors or officers of the association. This includes any misleading statements, errors in judgement, omissions, or negligence. D&O insurance also covers suits alleging breach of contract by the board or any legal defense for non-monetary lawsuits. D&O insurance is important because it protects the board as a whole, individual board members, committee members, and other volunteers under the board. This insurance gives peace of mind to those serving on the board and allows them to focus on their duties without worrying about personal liability. In addition, if something goes wrong, D&O insurance will help cover the costs of defending against any wrongful act allegations, which risk tends to be a concern for many volunteer board members.
Cyber Liability Insurance
Cyber liability insurance helps protect businesses from the costs associated with data breaches, cyber-attacks, and other online threats. Yes, the association is a business, and this protection is critically important. This type of insurance can cover things like expenses related to security fixes, ID theft protection, and legal defense. It can also provide business loss reimbursement in cases where a cyber-attack results in lost income. Some policies may also include coverage for cyber extortion defense, which can help businesses recover losses from extortion attempts. Cyber liability insurance is a vital tool for protecting businesses from the financial fallout of online threats, and it should be part of any comprehensive risk management plan.
Workers Compensation Insurance
For community associations, maintaining their own worker's compensation insurance policy is always a good idea and tends to be relatively inexpensive. This covers association volunteers who may sustain injuries while carrying out their duties. General liability insurance covers bodily injury; however, it excludes bodily injury to an employee. Therefore, volunteer injuries aren't covered under the GL policy because volunteers are considered employees when working on behalf of the association. Additionally, suppose a service provider working on the property has allowed their insurance to lapse. In that case, the association may be required to cover injuries as determined by the labor commission, in which case the association's worker's compensation policy would respond. In addition, associations that knowingly hire uninsured workers must report all payments to those contractors on the association's worker's compensation policy and pay associated premiums. Finally, when the association has its own worker's compensation insurance policy, it will cover damages or legal issues associated with the injury. Therefore, by having its own worker's compensation insurance policy, the community association can protect itself financially from potential liabilities related to the injury.
Crime and Fidelity Insurance
Crime and fidelity insurance is crucial for community associations. This insurance protects the association's money in operating and reserve accounts from embezzlement, check fraud, padding or false invoices, and computer and wire fraud. Crime and fidelity insurance isn't quite the same as employee dishonesty insurance because it protects different people. Crime and fidelity insurance covers past, present, and future board members, committee members, volunteers, and community managers. This kind of insurance can give peace of mind to the association's members, knowing their money is protected. In addition, if a crime is committed, the insurance will cover the losses incurred by the association. This can help to keep the association's finances healthy and maintain its good standing in the community. Even though the association's management company carries crime coverage, associations should always maintain their coverage for full protection.
Why are associations targeted?
Community associations typically have large amounts of money that remain in their bank accounts for long periods. For example, the reserve account might have funds set aside for future capital repairs, and these accounts tend to rise in value over time until a withdrawal is made. If your association is smaller, there may only be one person keeping an eye on the financials. On the other hand, if your association is large, several people may have their hands on the financials at one point or another. While either scenario doesn't make people any more or less likely to steal, it's always a good idea to have a system of checks and balances to ensure everyone is doing what they're supposed to be doing. Even if your association has engaged a trusted management company to manage the association's funds, remember that no entity is immune to crimes. Even the largest corporations, governments, and most well-protected entities have been subjected to fraud or security breaches.
What to do if a crime has been discovered
If a crime has been discovered, board members should immediately report it to their insurance agency and the authorities. The insurance company will want copies of the association's financial information and bank statements directly from the bank. This is why it's a good idea to have the association's financial records in good order so they can be easily located when needed. In addition, board members should take steps to secure any evidence of the crime so that it can be turned over to law enforcement. By taking quick and decisive action, board members can help minimize the damage caused by a crime and protect the association's finances.
Best Risk Management Practices
Ensuring all workers on association property have general liability and worker's comp insurance is essential. Unfortunately, the risk of not having these policies is ever present because injuries are commonplace, and penalties are steep. In addition, when third-party service providers do not have insurance or their policy has lapsed, the association is inevitably held liable.
Proper financial controls are a critical component of risk management. When handling the association's funds, individuals who are processing deposits, issuing payments, or reconciling financial statements must be trained, and protocols must be in place for the segregation of duties.
The electronic environment where association business is conducted and records are kept must have firewalls and security protocols. However, training is equally important to help mitigate this risk because human error is the most common peephole that allows criminals access to private information.
For volunteer board members, an additional best practice is to engage experts and rely on their guidance when addressing legal, insurance-related, or capital planning issues, or other important business functions carried out by the board. Being a do-it-yourself volunteer is not worth it in the end.
Community associations must have the right types of insurance policies in place to protect their members, board, and property. Further, these policies must have the correct underlying protections and limits. It is recommended that the board review coverage and policy limits each year with the association's insurance agent to ensure they fully understand policy exclusions and therefore be able to budget for deductibles or shortfalls. The policies we've discussed today all serve a unique purpose and work together to create a comprehensive risk management plan. This plan will reassure the board and the community that they are taking every step possible to protect themselves from potential risks.
Does your community have a comprehensive risk management plan in place? Are you interested in developing one? Click here or call us at 888.798.2624 to learn more about how CAMS can help protect your association.
In business for over 31 years, CAMS is North and South Carolina's premier community management company. With experienced local managers in each of its nine regions, CAMS is dedicated to providing innovative solutions to the community associations it serves. Additionally, CAMS was featured on Inc. Magazine's 2022 Inc. 5000 list of the fastest-growing private companies in America. To learn more, visit www.camsmgt.com/choose-cams.
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