An association may sustain a loss that is not entirely covered by the association’s insurance policies. For example, if a person sustains bodily injury while using the common areas and $3 million dollars in damages are awarded, the association’s insurance carrier will not cover the amount of damages which exceed the association’s $2 million dollar policy limit. In that situation, the association would likely be required to levy a special assessment (specifically, an “emergency assessment” pursuant to Civil Code Section 5610(a)) against the membership to cover the difference ($1 million dollars).
“Loss assessment insurance” is insurance that would generally cover the cost of the member’s portion of that special assessment. Loss assessment insurance is not purchased by the association, but by the association’s individual members. Loss assessment insurance can be purchased as an independent policy, but is more commonly purchased as a rider that is added to an owner’s underlying insurance policy.