How Lost Instrument Bonds Work

How Lost Instrument Bonds Work

How Lost Instrument Bonds Work



Don’t let the name fool you—lost instrument bonds have nothing to do with musical instruments. In fact, they deal with a much more serious matter than your child losing their violin. Lost instrument bonds guarantee that if a financial instrument (we’ll share examples of what those are shortly) is lost or stolen, that if it ever turns up then the bonded party can’t cash it or cause any harm to the financial institution who issued it. 


How can this be a problem? The financial institution that issued the financial certificate is held responsible for the duplicate and original copies they issue. For example, they are the party who must issue the funds if a duplicate check is cashed. It’s easy to see why these financial institutions need the protection they gain from a lost instrument bond and why they require them. 


Keep reading for more insight into how lost instrument bonds work and why they’re necessary.

What is a Lost Instrument Bond?

To recap—a lost instrument bond creates a guarantee that if an original lost instrument is found after a second version has been issued then the bonded party won’t be able to also cash that instrument or use it in another way that is detrimental to the issuing financial institution. 


Life happens and people do lose important financial documents. Other financial instruments that aren’t checks, can require a lost instrument bond if a duplicate copy is requested. For example, someone may lose proof of their mortgage and before they issue a new copy, the lender may require that the owner of the lost document have a lost instrument bond to ensure they will be protected by any losses suffered because of the duplicate instrument. 


Financial institutions are the party that requires the lost instrument bond. The following types of financial certificates are a few examples of what is protected under this specific type of surety bond:


    • Stock certificates

      • Check or money orders

        • Corporate bonds

          • Promissory notes

            • Certified checks

              • Cashier checks

                • Certificates of deposit

                  • Savings passbooks

                    • Real estate certificates

                      • Mortgages

                        • Life insurance policies

                        How These Bonds Work

                        Before a financial institution—such as a bank—will issue a duplicate of a lost or stolen financial certificate, they often require a lost instrument bond. There are two main types of lost instrument bonds.


                          • Open penalty. Financial instruments that have fluctuating market values require open penalty bonds (such as stock certificates). 

                            • Fixed penalty. This type of bond is required when a lost instrument has a fixed value (like a certified check or certificate of deposit). 


                            There are three parties involved in a lost instrument bond:


                              • The principal. The party that lost the instrument and who must purchase the lost instrument bond. 

                                • The obligee. The financial institution who issued the lost instrument. 

                                  • The surety. The company that issues the lost instrument bond and guarantees that the funds are available to the obligee if the lost instrument is cashed. 


                                  It may seem like lost instrument bonds only exist to protect the obligee, but in a roundabout way they help protect the principal as well. If financial institutions didn’t have the backing and security that comes with lost instrument bonds, they wouldn’t be willing to issue replacements for lost instruments as that would put them at too high of financial risk. The fact that lost instrument bonds are available, makes the stakes of losing financial instruments much lower for consumers. 

                                  How much does a lost instrument bond cost?

                                  So, exactly how much will it cost you to secure a lost instrument bond? That answer depends greatly on the value of the lost instrument. A lost instrument bond can cost anywhere from one percent to ten percent of the value of the lost instrument. Having a higher credit score can help you secure a lower rate for a lost instrument bond. 


                                  When shopping for a lost instrument bond, it can be very helpful to understand the following terms to make sure you are clear on how bond pricing works. 


                                    • Bonding capacity. The bonding capacity refers to the highest amount the financial institution can claim on the bond. If they file a claim against the lost instrument bond, you won’t pay more than the bonding capacity. 

                                    • Bond premium. The cost the principal will spend on the lost instrument bond is known as the bond premium. 

                                    • Bond term. How long the lost instrument bond is active for is known as the bond term. Typically lost instrument bonds only last a year, but they can be renewed for multiple year terms. During this term, the surety can’t cancel or release the lost instrument bond as the lost instrument may be found or returned which creates a liability for the financial institution.