Freddie Mac Guidelines: Fidelity Insurance for Condos and Co-ops

What Fidelity Insurance Protects Against

When you buy a condo or co-op, you're not just buying your unit. You're also buying into a community where the homeowners association or cooperative corporation collects monthly fees and manages significant amounts of money. This creates risk.

Fidelity or employee dishonesty insurance protects the association against theft, embezzlement, or fraud by the people who handle the money. This includes board members, property managers, employees, and even volunteers who have access to association funds.

Say your 100-unit condo building collects $500 per month from each owner for maintenance and reserves. That's $50,000 flowing through the association every month. Without proper insurance, a dishonest property manager could steal those funds and leave owners scrambling to cover essential repairs and services.

When This Insurance Is Required

Fannie Mae requires fidelity insurance for most condo and co-op projects, but several exceptions exist. You don't need this coverage if your project has 20 units or fewer. The logic here is simple: smaller buildings typically have less money at risk and more direct owner oversight.

The insurance requirement also doesn't apply if the calculated coverage amount would be $5,000 or less. This typically happens in very small projects where monthly assessments are low.

Certain streamlined review projects and those delivered as "Exempt From Review" also skip this requirement. These are typically newer projects or those that have already been thoroughly vetted by Fannie Mae.

How Much Coverage You Need

The basic rule is straightforward: coverage must equal the maximum amount of money the association or management company holds at any time. This includes operating funds, reserve accounts, and any special assessments collected but not yet spent.

For a typical condo project, this might mean covering several months of assessments plus whatever reserve funds have accumulated over the years. A 50-unit building collecting $400 monthly from each owner would need coverage for at least $20,000 in monthly collections, plus potentially hundreds of thousands in reserve funds.

However, associations can reduce their coverage requirements by implementing stronger financial controls. With proper controls in place, coverage only needs to equal three months of total assessments.

Financial Controls That Reduce Coverage Requirements

Fannie Mae accepts reduced coverage when associations implement specific financial safeguards. These controls must include at least one of several protective measures.

The most common approach involves maintaining separate accounts for operating funds and reserves. The bank must send monthly statements directly to the association, not just to the management company. This creates transparency and makes it harder for managers to hide unauthorized transactions.

Another acceptable control requires management companies to maintain separate records for each association they serve. Under this arrangement, the management firm cannot transfer money from the reserve fund without specific authorization.

The third option requires two board members to sign any checks drawn from the reserve fund. This creates a checks-and-balances system that prevents any single person from accessing reserve money without oversight.

Who Must Be Covered Under the Policy

The insurance must cover anyone who handles association money. This includes obvious candidates like the property manager and association employees, but it also extends to board members, trustees, and volunteers with financial responsibilities.

Professional management companies present a special case. The management firm must carry its own fidelity coverage or be covered under the association's policy. Either way, the association needs proof that the management company is properly insured.

Say your association hires ABC Property Management to handle day-to-day operations. ABC must either show you their own fidelity policy that covers their work for your association, or they must be specifically named and covered under your association's policy.

Policy Requirements and Documentation

The fidelity insurance policy must name the homeowners association or cooperative corporation as the insured party. The association must pay the premiums as a common expense, just like any other shared cost of building operations.

Lenders will require documentation proving the insurance exists and meets Fannie Mae requirements. This typically means providing a copy of the insurance policy or a certificate of coverage that shows the coverage amount, effective dates, and covered parties.

The documentation must clearly show that the coverage amount meets the required threshold, whether that's the full amount of funds held or the reduced amount allowed with enhanced financial controls.

State Law Complications

Some states have their own requirements for condo and co-op fidelity insurance. When state law requires different coverage terms than Fannie Mae, the state requirements take precedence. Fannie Mae will accept compliance with state law as meeting their guidelines.

This can work in your favor if your state requires less coverage, but it can also mean higher requirements in states with stricter rules. Your association's attorney or insurance agent should know how your state's requirements compare to Fannie Mae standards.

Common Problems and Red Flags

The biggest issue arises when associations try to save money by carrying inadequate coverage. Some boards look at their current bank balance and buy coverage based on that amount, not realizing they need to cover the maximum funds they might hold at any time.

Seasonal assessments can create coverage gaps. If your association collects a special assessment for a major project, the temporary spike in funds might exceed your coverage limits. The insurance needs to account for these peak periods.

Management company changes can also create problems. When associations switch management firms, they need to ensure the new company is properly covered under the fidelity policy. Gaps in coverage during transitions can leave associations vulnerable.

Another common mistake involves reserve fund access. Some associations think they can reduce coverage by limiting who can access reserves, but the insurance must still cover the full amount unless specific financial controls are implemented according to Fannie Mae guidelines.

References

For the official guidelines, see 4703.5: Fidelity or employee dishonesty insurance for Condominium Projects and Cooperative Projects in the Fannie Mae Selling Guide.