States mitigate financial risks from licensee errors by either requiring errors and omissions insurance or by creating a recovery fund derived from license fees to compensate those affected by professional mistakes.
For protection against financial harm to clients or customers, some states require errors and omissions insurance for licensees, while other states have established a recovery fund taken from license fees and used to compensate victims of licensee mistakes and misdeeds.
Similar to how workman's compensation insurance requires employers to pay into state-level funds that benefit employees injured on the job, these recovery funds serve as a protection mechanism. A recovery fund is essential for ensuring clients or customers can recoup losses due to professional negligence or wrongdoing without solely relying on insurance coverage.
Such financial safeguards are akin to deposit insurance where banks contribute a portion of deposits to a fund protecting depositors in the event of bank failure. In the context of licensee protection, the establishment of a recovery fund provides a pool of resources to address claims, thereby enhancing trust in professional services and mitigating potential financial risks for consumers.