An East Bay association can accumulate several hundred thousand dollars in reserves and still keep every dollar in one checking or savings account at a single bank. The FDIC insures deposits of a corporation, partnership, or unincorporated association up to $250,000 per insured bank. Amounts above that limit at the same institution are uninsured. If the bank fails, the uninsured portion can be lost. Directors who left large reserve balances exposed can face questions about whether they met the duty of care they owe under Corporations Code section 7231. The resulting shortfall usually arrives as a special assessment. The personal-liability questions arrive with it.
Most boards treat the bank that already holds the operating account as the natural place for reserves. The account is convenient, the statements arrive together, and the treasurer has one login. The FDIC does not treat convenience as a separate ownership category. All deposits owned by the association at the same bank are added together and insured only to $250,000. An association with $80,000 in operating funds and $620,000 in reserves at one bank has $700,000 on deposit and $250,000 of insurance. The remaining $450,000 is uninsured. Credit unions carry the same $250,000 limit through the National Credit Union Administration. The Davis-Stirling Act requires a separate reserve account under section 5380 and restricts the use of those funds under section 5510. It does not require the board to keep the balance fully insured. The fiduciary duty of care does.
How the Limit Actually Works for an Association
The FDIC insures traditional deposit products—checking accounts, savings accounts, money market deposit accounts, and certificates of deposit—at member banks. It does not insure stocks, bonds, mutual funds, or money market mutual funds. For an HOA organized as a nonprofit mutual benefit corporation, all of its accounts at one bank fall into the corporation, partnership, or unincorporated association ownership category. The number of directors, officers, or members does not multiply the coverage. The association is one depositor. Opening a second account at the same bank does not create a second $250,000 limit. Moving the excess to a different FDIC-insured bank does.
Services such as the IntraFi Cash Service or CDARS allow an association to open one relationship at a participating bank while the deposits are distributed across multiple banks so that no single institution holds more than the insured limit. The association still receives one statement and retains liquidity. Boards that have never asked the bank whether the association’s combined balances exceed $250,000 have not yet performed the reasonable inquiry that section 7231 contemplates. East Bay associations that keep operating and reserve funds at the same institution for years often discover the exposure only when someone reviews the most recent bank statements against the FDIC’s Electronic Deposit Insurance Estimator.
Associations that spread balances across several banks or use an insured cash-sweep service keep the full reserve balance protected without changing how the treasurer reviews monthly statements. Financial management that reconciles accounts monthly under section 5500 and confirms insurance coverage at the same time makes the exposure visible before a bank failure occurs.
The Fiduciary Duty and What “Reasonable Inquiry” Looks Like
Corporations Code section 7231 requires directors to perform their duties in good faith, in a manner they believe to be in the best interests of the association, and with the care, including reasonable inquiry, that an ordinarily prudent person in a like position would use under similar circumstances. Directors may rely on information from officers, employees, and professionals they reasonably believe to be reliable. They may not ignore information that is readily available. Bank statements that show a reserve balance well above $250,000 at a single institution are readily available. A board that reviews those statements each month under section 5500 and never asks whether the balance is insured has not completed the inquiry the statute describes.
The duty does not require directors to become deposit-insurance experts. It does require them to ask a straightforward question once the balance exceeds the published limit and to document the answer. An association that moves excess funds to a second FDIC-insured bank, or that places them through a service that distributes them across multiple banks, has taken a step that an ordinarily prudent person would recognize as ordinary. An association that leaves $700,000 at one bank because “we have always banked there” has not. If the bank later fails and the uninsured portion is lost, owners who receive a special assessment to replace the missing reserves will have a record of monthly statements that showed the exposure and minutes that do not show any discussion of it.
Directors who document the inquiry, the decision, and the subsequent transfer or placement reduce the chance that a later claim will turn on whether they simply never looked. Compliance support that reviews the monthly reconciliations and confirms that balances above the limit are either moved or placed through an insured distribution service produces that record without requiring the board to manage multiple bank relationships itself.
What Happens If the Uninsured Balance Is Lost
Bank failures remain uncommon, but they are not theoretical. When an insured bank fails, the FDIC typically arranges for another institution to assume the deposits up to the insured limit. Amounts above that limit become claims against the receivership. Recovery of the uninsured portion depends on the assets available and can take months or years. In the meantime the association no longer has the money it had set aside for the roof, the paving, or the elevated-element repairs identified in the reserve study. The shortfall is usually filled by a special assessment. Under section 5605 a special assessment that, together with any other special assessments for the year, exceeds 5 percent of budgeted gross expenses requires membership approval unless an emergency under section 5610 applies. A bank failure that eliminates uninsured reserves is unlikely to qualify as an emergency that allows the board to act without a vote.
Owners who must pay the special assessment will ask why the board left the money uninsured when the means to insure it were ordinary. Directors who can point to a documented decision to place the excess through a multi-bank service, or to move it to a second bank, have answered the question. Directors who cannot point to any such decision will face the additional question of whether the failure to inquire and act breached the duty of care. California law provides certain protections for volunteer directors who act in good faith and within the scope of their duties. Those protections are weaker when the record shows that the board never examined a known risk that was disclosed on the monthly bank statement. The special assessment arrives first. The questions about personal liability arrive when owners who have already paid the assessment ask their attorney whether the directors’ inaction is actionable.
What Boards Can Do Before the Question Arises
Boards that still have time can request a current schedule of all association accounts at each institution and compare the combined balances to the $250,000 limit. They can ask the existing bank whether it participates in a deposit-distribution service that keeps balances fully insured. They can open an account at a second FDIC-insured bank and transfer the excess. They can record the inquiry and the decision in the minutes of an open meeting. Each of those steps is ordinary, inexpensive relative to the size of a typical reserve balance, and consistent with the reasonable-inquiry standard in section 7231. Associations that have already taken one of them can confirm annually that new contributions have not pushed any single institution above the limit.
Associations whose combined balances at any one bank already exceed $250,000 have a clear, limited task. Associations whose balances remain under the limit can adopt a policy that triggers a review whenever the balance approaches it. SLPM Association Management Services has coordinated banking arrangements, monthly reconciliations, and reserve disclosures for East Bay associations since 1991. If your board is reviewing bank statements that show reserve balances above the FDIC limit at a single institution and has not yet documented a decision to insure the excess, the free proposal process lets you see the exposure and the ordinary steps that close it before the next monthly reconciliation.
Request your free association management proposal here. We will review your current bank statements, reserve balances, and recent minutes and identify the accounts and documentation items that leave directors exposed under the fiduciary duty of care.
Sources
- FDIC: Are My Deposit Accounts Insured?
- FDIC Electronic Deposit Insurance Estimator (EDIE) FAQs
- California Corporations Code § 7231 (standards of conduct for directors)
- California Civil Code § 5380 (separate operating and reserve accounts)
- California Civil Code § 5500 (monthly review of financial statements)
- California Civil Code § 5605 (limits on special assessments)