While there are some risks in allowing customers to deposit checks that are not endorsed, there are far fewer risks in paying unendorsed checks that are drawn on customer accounts, as explained below.

Payment of Unendorsed Checks Drawn on Customer Accounts

When a depositary bank sends you a check written by one of your customers for collection, that bank is warranting to you (and to your customer) that it has paid the check to the payee, or that it has deposited the check in the payee’s account. 810 ILCS 5/4-205(2). Therefore, if your customer complains that the check wasn’t paid to the correct person, any liability should fall on the depositary bank.

You also may want to pull your account agreements, in case you have agreed to review checks for proper endorsements.

Customer Deposits of Unendorsed Checks

On the other hand, when your customers deposit checks into their accounts without endorsing them, your bank is in the position of a depositary bank. If your customer delivers a check to your bank for deposit, you are entitled to enforce the check, “whether or not the customer indorses the item.” 810 ILCS 5/4-205(1). However, the same warranty rule discussed above will apply: your bank will have to make a warranty to the payor bank that the check was paid to the proper payee. 810 ILCS 5/4-205(2). If the drawer of the check complains that the check wasn’t paid to the proper payee, you may be liable to the drawer. For that reason, many banks manage this risk by examining deposited endorsements only on checks that are larger than a certain cutoff dollar amount.