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.
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:
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.
There are three parties involved in a lost instrument bond:
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.
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.