Who is covered by fidelity guarantee insurance?

Following the amendment to community scheme property legislation, most community schemes have now complied with the requirement for appropriate fidelity guarantee insurance. Specialist community scheme property insurers have presented CSOS compliant fidelity insurance to meet the new requirements in conjunction with accepted insurance industry cover offerings.

In recent policy wording updates, one of the leading insurers in the issuing of community scheme fidelity insurance has made some changes to their policy wordings to clarify the intent of the cover in respect of who is insured and who is not. This has raised some interesting and important considerations relating to community scheme fidelity insurance.

To achieve greater clarity and understanding, it is important to first understand certain basics of fidelity insurance cover.

1. CSOS regulation – in terms of regulation 15(1) “every community scheme must insure against the risk of loss of money belonging to the community scheme or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by any insurable person.”

2. The cover – the fidelity guarantee insurance policy provides indemnification for financial loss suffered by the insured against various perils listed in the policy wording. These perils include theft of money, extortion, computer crime and fraudulent funds transfer.

3. The insured – is the party to whom the cover is granted – i.e. the scheme (body corporate / share block / HOA). The fidelity cover is in place to protect the rights and interests of the insured.

4. Other parties – such as the managing agent and other service providers; they are independent entities who are contracted to perform certain functions for the insured. They are not included as part of the insured but under CSOS compliant fidelity cover they are included as insurable persons.

5. Insurable person – is defined in line with the CSOS legislation and includes scheme executives, employees or agents of the scheme and a managing agent, including their staff acting under their direction – all of whom have access and control of the scheme monies.

Recent updates introduced by some insurers to their fidelity policy wordings have been made to clarify the fact that the fidelity policy is not in place to cover losses or incidents suffered by the managing agent or other contractors employed by the scheme.

For that reason, it is critical for scheme executives or trustees to ensure that their managing agents (and any other service providers who have access to scheme monies) have suitable and sufficient insurance protection for their businesses. If they don’t and the managing agent or service provider suffered an incident of fraud and lose funds belonging to the scheme as a result, they will not be able to recover any money lost for the scheme, either through their own fidelity insurance cover or through legal recovery from the managing agent or contracting firm.

In addition, scheme executives need to satisfy themselves that any fidelity insurance taken out by their managing agent on a group scheme basis provides adequate cover to accommodate all clients included by the managing agent under their policy. In the event of a criminal action against the managing agent where multiple clients lost funds in the same incident and the insurance value is insufficient, full compensation may not be possible.

Author: Bruce Gibson

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