Fidelity cover is one of the most misunderstood parts of sectional title insurance. Trustees often focus on buildings and geyser claims, but scheme funds also need protection.
Body corporates collect levies, hold reserve funds and may manage significant amounts of money. Fidelity cover is designed to respond to losses involving fraud or dishonesty by people who handle or control those funds.
What does fidelity cover protect?
Fidelity cover protects the body corporate against loss of funds belonging to the scheme or for which the scheme is responsible, where the loss results from fraud or dishonesty by relevant people such as trustees, managing agents, employees or other agents.
Why this matters
Many sectional title schemes hold operating funds, reserve funds and project funds. If money is stolen or misused, the financial impact can be serious and may result in special levies or delayed maintenance.
What amount should be insured?
The required amount should not be guessed. Trustees should consider the scheme’s reserves, investments and operational budget. Trustees should check whether their policy amount is sufficient for the scheme’s funds and exposure.
Questions trustees should ask
- What is the current fidelity cover limit?
- Does it reflect the scheme’s reserve funds and operating budget?
- Does the policy wording cover the relevant people handling scheme funds?
- Are there exclusions, conditions or reporting requirements?
- Does the managing agent have separate fidelity cover, and does it meet the scheme’s needs?
- Is the fidelity limit approved or noted properly at the AGM?
Common questions
Does fidelity cover protect reserve funds?
It can, subject to the policy wording, limit, conditions and circumstances of the loss. Trustees should check whether the limit is sufficient for reserve and operational funds.
Does the managing agent’s fidelity cover protect the scheme?
It may help, but trustees should not assume that the managing agent’s policy automatically meets the body corporate’s needs. The scheme’s own policy and requirements must be reviewed.
Is fidelity cover the same as trustee liability?
No. Fidelity cover deals with fraud or dishonesty involving scheme funds. Trustee liability relates to liability arising from trustee decisions or actions, subject to the policy wording.
Fidelity cover is not a substitute for good controls
Insurance does not replace proper financial controls. Trustees should still ensure proper bank mandates, payment approvals, financial reporting, audit processes and managing agent oversight.
Final thought
Fidelity cover protects against a risk trustees hope never happens. But because scheme funds belong to owners collectively, this cover should be reviewed carefully every year.