What you should know about fidelity insurance

(Updated 14 August 2024)

Traditionally, fidelity insurance is an insurance product that provides protection against business losses caused due to employee dishonesty. A basic insurance policy with an insurer will provide cover to a body corporate from employee dishonesty and dishonesty of trustees.

Regulation 15 of the Community Schemes Ombud Services (CSOS) Act stipulates that a community scheme is obliged to have such cover and that it must be extended to meet certain criteria. Every community scheme must be insured against the risk of losing money belonging to the community scheme, sustained as a result of any act of fraud or dishonesty committed by any insurable person including scheme executive, employee, managing agent, or a contractor controlling money.

Both the Community Schemes Ombud Services Act regulations (Regulation 15) and the Sectional Title Schemes Management (STSM) Act Prescribed Management Rule 23.(7) should be read in conjunction with one another.

CSOS sub-regulation 15.(3) is clear. A community scheme (both sectional title schemes and HOAs) must purchase fidelity cover for a minimum amount of:

(a) the community scheme’s investments and reserves at the end of its last financial year; and

(b) 25% of the community scheme’s operational budget for its current financial year.

Our interpretation of this is that the CSOS Act sets out the minimum amount of cover required but the owners, at a general meeting, will decide whether any more cover is needed (as per PMR 23.7).

What does this mean for trustees?

CSOS regulation 14 makes it clear that trustees (scheme executives) should take reasonable steps to obtain sufficient information and advice on all matters, and to inform and educate themselves.

FAIS (Financial Advisory and Intermediary Services) legislation requires that the financial advisor or insurance broker should provide written advice on these matters. The best course of action is for trustees to be familiar with the basic important insurance aspects for the scheme but, most importantly, to cover themselves by ensuring that they receive the appropriate written advice from the broker.

Once the annual financial statements are received and the budget has been prepared, trustees should see to it that steps are being taken to update their fidelity insurance. This should then be included on the agenda at the following AGM where the owners should confirm that the amount is sufficient, or not.

Where this has not been attended to, and a loss occurs, the scheme executives could find themselves in a compromised position.

What does this mean for managing agents?

This is an important aspect for managing agents who should re-look the scheme’s fidelity insurance once the draft financials become available and budgets are being considered and prepared. The portfolio manager could do the formula calculation or they could seek the insurance advisor’s input in estimating the correct amount.

On the other hand, managing agents also need their own fidelity cover as the scheme’s policy only covers the scheme against losses caused by the managing agent or their staff.  There is a misconception that the scheme’s fidelity covers the managing agent as well – this is not the case. The scheme’s insurance covers the body corporate against the managing agent’s actions, not managing agent itself. The insurer will likely seek to recover the settlement for the scheme’s loss from the managing agent afterwards; that is why it is important for a managing agent to have this cover in place.

It is important for managing agents to also have their own cover for risks such as cyber crime as scheme executives may be reluctant to allow claims where the managing agent is at fault, or has not met policy conditions.