Managing association funds and maintaining association insurance are two important responsibilities the Board of Directors (“Board”), along with the association’s management company, must undertake.
AB 1101 was recently passed and signed into law by Governor Newsom and became operative January 1, 2022. This new legislation requires the association’s managing agent to change the way association funds are deposited and maintained and requires the association to add additional insurance coverage to its books. These changes, including additional responsibilities and obligations, are discussed below.
Under current law, upon written request of the Board, a managing agent must deposit association funds into a bank, savings association, or credit union, so long as, amongst other requirements, the funds are insured by the federal government.
AB 1101 now requires the institution at which association funds are deposited to be insured by the Federal Deposit Insurance Corporation (“FDIC”), National Credit Union Administration Insurance Fund (“NCUA”), or a guaranty corporation. AB 1101 also explicitly prohibits managing agents from investing association funds in stocks or high-risk investment options.
In practice, this change means managing agents will be required to deposit association funds in qualifying banks or credit unions that meet the aforementioned depository insurance requirements. Associations should be aware that rates of interest at depository institutions are typically lower than the rates of return generated from investments in stocks and other assets. As a result, to the extent association funds are currently invested in stock and other assets, an association may see a decrease in the return on deposited association funds once AB 1101 becomes operative. Moreover, if association funds are currently deposited in stocks or other assets, arrangements must be made to terminate those positions.
Current law allows a managing agent to comingle association funds in certain, limited circumstances. AB 1101 removes these exceptions and prohibits, without qualification, a managing agent from comingling associations funds with the managing agent’s own money or with the money of others that the managing agent receives or accepts.
Therefore, if not already doing so, managing agents should ensure each association from whom the managing agent receives funds has its own separate account(s). Additionally, managing agents should maintain independent financial ledgers for each association from whom the managing agent accepts funds to ensure proper financial reconciliation.
AB 1101 also changes the requirements for transfers out of the association’s reserve or operating accounts. These requirements are based on the number of separate interests in the association.
For associations with 50 or fewer separate interests, transfers of funds out of the association’s reserve or operating accounts require prior written approval of the Board unless the amount transferred is the lesser of five thousand dollars ($5,000) or five percent of the estimated income in the annual operating budget.
For associations with 51 or more separate interests, transfers of funds out of the association’s reserve or operating accounts require prior written approval of the Board unless the amount transferred is the lesser of ten thousand dollars ($10,000) or five percent of the estimated income in the annual operating budget.
In light of these low transfer limits, it is possible that routine maintenance and repair obligations will often exceed amounts that can be transferred without written Board approval. As such, Boards should contact their legal counsel to discuss drafting and utilizing a standard written approval document that can be repeatedly leveraged to provide written Board approval, thereby easing administrative burden on the Board.
AB 1101 also changes an association’s insurance obligations. In particular, AB 1101 requires an association to now maintain the following types of insurance: crime insurance, employee dishonesty coverage, and fidelity bond coverage, or their equivalent, for the association’s directors, officers, and employees in an amount that is equal to or more than the combined amount of the reserves of the association and total assessments for three months. The association must also maintain protection against computer fraud and funds transfer fraud.
If the association uses a managing agent or management company, the association’s crime insurance, employee dishonesty coverage, and fidelity bond coverage, or their equivalent, must additionally include coverage for, or otherwise be endorsed to provide coverage for, dishonest acts by that person or entity and its employees.
To the extent an association does not already maintain such insurance policies, the Board should contact and work with the association’s management company to procure these additional insurance policies and ensure the same are effective and active.
Finally, AB 1101 explicitly dictates that self-insurance does not satisfy the association’s insurance responsibilities and obligations under the new law. Although an association may feel inclined to self-insure in the above-referenced situations, such self-insurance is explicitly prohibited. The goal of these additional requirements is to ensure the association has proper financial protection should a claim arise. Due to the fact that many of the situations referenced above include the commission of a crime, fraud, or other dishonest act, self-insurance does not provide the necessary, transparent, protection the legislature has envisioned.
If the Board or management representative has any questions regarding these new laws and accompanying responsibilities, they should contact us to discuss.