When Crime Insurance Doesn’t Pay: The Importance of Reading the Fine Print

On Tuesday, July 13, 2010, Michael Richter, former owner of Charter Management Realty, was arrested and charged with five counts of second-degree grand larceny and five counts of first-degree falsifying business records. He was charged with embezzling nearly $949,877 in tenant maintenance fees over a six-year period from five buildings in Jamaica, Forest Hills, Rego Park, and Elmhurst, Queens. The former manager was also accused of sending out falsified business records that disguised the thefts. He pleaded guilty to third-degree grand larceny, a Class D felony, on January 25, 2011.

Three years after Richter’s plea, Alan Gorelick, the former executive vice president of the Manhattan property management firm Saparn Realty, pleaded guilty to stealing $2.6 million from roughly 30 buildings he had managed. He was convicted in Manhattan Supreme Court of second-degree grand larceny, criminal possession of a forged instrument, and scheming to defraud.

These are a couple of recent board horror stories that fuel every co-op and condo board’s worst nightmare: our property manager is a crook. Could anything make it worse? How about a technicality on your insurance policy that allows the insurance company to decline your claim? Believe it or not – if you don’t read the fine print or you get the wrong type of insurance – it could happen to you.

“We represented a building that was self-managed that went to a local person for insurance advice who recommended a fidelity bond,” recalls Tara Snow, a partner with Queens-based Novitt, Sahr, and Snow, which works with co-ops and condos in the New York area. “The co-op purchased the recommended policy, which would cover any corporation, but was not meant for a self-managed co-op specifically.” A board member proceeded to steal money from the co-op. But in order for the co-op to collect, the policy required that the thief had to be a paid employee of the corporation and adjudicated in court. Since the culprit was a non-salaried board member, the co-op’s claim was denied.

Victims should never be penalized for the bad behavior of others, but the takeaway is that the impact of a financial crime can be minimized with the correct insurance coverage. And since insurance policies can be complex, boards need to have one that covers all angles if they fall victim to clever thieves like Richter and Gorelick, or an errant bookkeeper, or a fellow board member with light fingers.

Coverage Matching the Crime

First, it is a given that you must have insurance. “Do co-ops and condos need insurance coverage against crime?” asks Barbara Strauss, executive vice president of York International Agency, a New York-based insurance brokerage. “Absolutely. Definitely absolutely. You have exposure from the managing agent, from the board members, and from other employees. You must protect the corporation.”

The twist is to find crime coverage that specifically fits your co-op or condo, and to make sure the fine print covers all eventualities. Volunteer boards and third-party perps can mean that, come claim time, nothing at all adds up. So speaking with brokers who understand the business of co-ops and condos is essential to finding the correct policy for your building. The biggest question is: what’s best, a fidelity bond or a comprehensive crime policy?

Stephen Bedosky, a vice president at York International, says that a good crime policy works like an umbrella. It covers not only employee theft but also theft by designated agents, such as a property manager. “A crime policy will also cover theft by third parties in various capacities, such as forging checks or hacking into a computer and wiping out the funds of the association,” Bedosky says. “A fidelity bond is usually something that is posted by a third party. If I steal your money, that fidelity bond will take the place of the missing money. You don’t see fidelity bonds much anymore. I think I’ve seen one once in the nine years I’ve been working in crime insurance.”

His Crime Is His Bond

“I write a crime policy, not a bond,” adds Liz Raifman, president of Liz Raifman Risk Management Services, a part of the B&G Group insurance company. She agrees that a crime policy is a perfect catch-all for co-ops and condos. “A bond is a surety (that says) somebody is honest based on all the facts you give to the bond company – which is a lot more information than a crime policy. A crime policy, especially with condos and co-ops, extends the coverage from employee dishonesty to things like missing money, computer fraud, forgery, safe burglary, theft, and dishonesty.”

Raifman adds that, with insurance, discovering the crime is only the beginning of the story, especially when it comes to recovering lost funds. “As an example, a managing agent will commit a crime and it may not be discovered by the co-op or condo right away,” she says. “You may not even discover the money is missing because, unfortunately, a lot of co-ops and condos trust the managing agent to the point where they don’t even co-sign checks. Boards don’t know a lot of what is going on.”

Raifman also believes in doubling down – that is, boards should ask managing agents to take out a crime policy to cover themselves in the event one of their employees is dishonest. Managing agents usually have many buildings under their control, meaning comprehensive coverage is cost-prohibitive.

Instead, Raifman suggests, building management should take out a policy that offers coverage up to a specific amount. If that coverage does not exist, any stolen money – especially when it is millions of dollars like the amount stolen by Gorelick – may be impossible to recover even if a co-op or condo has coverage. “The managing agent doesn’t have the stolen money – somebody has already spent it,” says Raifman, outlining a worst-case scenario. “But if they had a crime policy, at least the money would be covered on their policy.”

Raifman says that, although each policy is different and deductibles also play a role, a typical crime policy costs a condo or co-op around $1,000 per year and is based on a building’s income over the year. A recent $1,000 policy she wrote covered employee theft up to $400,000.

“Most people want a policy for a co-op or condo where the building burns down or someone trips,” she says. “They’re not always aware that they need directors-and-officers insurance, or a crime policy.”

The Right Coverage

Finding the right coverage may seem risky in itself, but Ed Mackoul, president of Mackoul & Associates, a New York insurance brokerage, says a broker experienced in co-ops and condos will be able to make sure you are covered. “It is absolutely a necessity,” he says, partly because legislation surrounding Fannie Mae bank loans require co-ops and condos to carry coverage equal to 25 percent of annual maintenance or common charges. A self-managed co-op may have one person who is in charge of the money. They have access to money and there is temptation. In most cases that is not a problem, but if you have only one person who is in charge of money, you can have a problem.”

Just when you start feeling comfortable about having the right coverage, here comes something else to consider. Insurance brokers say industry chatter is not only about an employee or someone from inside your building who may pose a threat; online grifters and internet con men now target co-ops online. Insurance companies are being forced to adapt to cybercrime.

“Someone who is a legitimate employee of the managing agent, or a bookkeeper, may get what looks like an e-mail from the board president or a property manager,” explains Bedosky. “But the e-mail is a clone and they are deceived into wiring funds somewhere. The money is out of the account quickly and it is very hard to trace.”

In a double-whammy for victims of the online deceit, Bedosky warns that some insurance companies won’t pay out on that kind of crime, claiming the victim gave up the money. In other words, to prevent getting mugged twice, double-check your policy and make sure you have the right coverage.

“In some instances, people can be vulnerable and there are not enough channels in place to stop it,” says Mackoul. “I hate to say it but people do steal money.”