The Perils of Bank Drafts Part 1 – Lost in Transit

Banks often portray bank drafts as a safe and convenient way to move large sums of money. What is frequently left out of the conversation is what will happen if the bank draft gets lost before being cashed. To see how important this can be, one need only look to the plight of Ms. Lorette Taylor.

Ms. Taylor was distributing her father’s estate. Her brother, who lived relatively far away, was due $846,000. To get the money to her brother, she asked TD Canada Trust to provide her with a bank draft. She then arranged for UPS to transport it to him.

Unfortunately, the bank draft went missing in transit. UPS, like all major courier companies (including Canada Post), does not offer insurance that will cover the value of financial instruments like bank drafts and certified cheques. So, when Ms. Taylor sought compensation from UPS, they only reimbursed her the $32 that she paid to send the bank draft.

Ms. Taylor then went to TD and asked them to cancel the lost bank draft and issue a replacement. TD refused to do so unless she signed an indemnification agreement in which she agreed to reimburse TD the full $846,000 if the missing bank draft were ever cashed. TD also wanted to place a lien against her home and for her to take out GICs totalling $846,000. While, after the situation gained media attention and public pressure came to bear, TD dropped its demand for a lien and the GICs, they still refused to release the replacement bank draft unless Ms. Taylor signed the indemnification agreement. She did so, and they issued a new bank draft.

TD was not simply being difficult. TD was trying to protect itself against the possibility that the missing bank draft might later turn up and be cashed. This is a significant risk for the bank because bank drafts represent guaranteed funds. If the missing bank draft surfaced later, the bank would be bound to pay it out, and bank drafts do not expire. If both the lost and the replacement bank drafts were eventually cashed, TD would be out nearly a million dollars. Banks, being generally risk-averse entities, do not want to take that chance without having some way of recouping that money in place. This leaves Ms. Taylor in the unenviable position of having the possibility of that lost bank draft being cashed, at great expense to her, hanging over her head indefinitely.

Because of the risk that this unfortunate scenario illustrates, bank drafts should be treated as though they are cash. If you wouldn’t put a given sum of money in the mail, you should generally not put a bank draft for that sum of money in the mail either. A bank draft for a million dollars is easier to carry than a suitcase full of cash but it isn’t much safer to let out of your control until it has reached its final recipient. Similar considerations apply to certified cheques.

Next time, we will look at another recent cautionary tale with another wrinkle: bank drafts being sent across international borders.