DEFINITION of 'Central Loss Fund'
A fund set aside by some states in order to cover policyholder claims if an insurance company is declared insolvent. A central loss fund is created by state insurance regulators through the collection of assessments on insurance companies operating in the state. Most states have a central loss fund of some type, however the details of their operations differ according to their respective state laws.
BREAKING DOWN 'Central Loss Fund'
A central loss fund is important to protect the interests of policyholders in the event an insurance company is unable to pay claims. The states' respective insurance commissioners are responsible for overseeing insurance companies and ensuring that they maintain adequate collateral to cover expected losses. However, widespread and unanticipated catastrophes may still arise which result in claims exceeded an insurance company's ability to pay.