Why issuers ask for a bond
Before issuing a replacement, financial institutions want legal protection in case the original and the replacement both exist. Without it, both could be cashed or transferred, by accident or by fraud. That is called double redemption.
The lost document bond gives the issuer that protection. If the original turns up and someone presents it, the surety covers the issuer's loss and recovers from the person who asked for the replacement.
Open penalty and fixed penalty
There are two types of lost document bonds, and the issuer will tell you which one it needs.
| Type | Used for | How the amount works |
|---|---|---|
| Open penalty | Instruments whose value moves, such as common shares | No fixed dollar limit. The bond covers the value of the instrument at the time a claim arises. |
| Fixed penalty | Instruments of fixed value, such as corporate debentures, certified cheques and bank drafts | A stated amount, usually the face value of the document. |
Open penalty bonds carry more risk for the surety, because the exposure rises with the share price. They take more underwriting than a fixed penalty bond for the same document.
Documents that commonly need a bond
- Stock certificates, common or preferred.
- Debentures and corporate bonds.
- Federal, provincial and municipal bonds.
- Certified cheques and bank drafts.
- Life insurance policies.
- Warrants and other financial instruments.
Blanket programs and the files they leave behind
Many transfer agents run a master lost instrument bond with a surety, so small replacements are handled in-house. The shareholder signs an affidavit of loss and pays a fee, and no separate bond is needed.
The large files fall outside those programs. TSX Trust, for example, requires the shareholder to obtain its own open penalty bond when the shares are worth more than $250,000, or when it has no bonding arrangement with the issuer. Those are the files that come to the surety market, and to your desk.
What the underwriter looks at
- The document and its value. What was lost, how much it is worth, and if the value moves.
- The circumstances. How and when it was lost, and if a stop has been placed with the transfer agent or bank.
- The applicant. The owner's or company's financial strength. On large open penalty bonds, expect a closer look.
- The paperwork. A signed affidavit of loss and the issuer's own requirements.
- Estates. Lost certificates often surface during estate administration. The estate trustee's authority and the estate documents go with the file.
