Who Is Liable for Forged Checks?

Computer technology has made it easier than ever to create fraudulent bank instruments. Forged and counterfeit checks cause significant losses to banks and their customers. However, it is not always clear who is ultimately liable for these losses.

The person who forged the check is always liable to the account holder and the bank for conversion (or taking what is not yours), fraud and other causes of action. Unfortunately, by the time the forgery is discovered, the forger is usually long gone, leaving the bank and the customer to fight it out.

A bank's liability for a forged check arises because it maintains your signature in its records and is therefore in the best position to verify the signature's accuracy and prevent the fraud. Under the Uniform Commercial Code (UCC) adopted by most states, a bank may only charge you for checks that are "properly payable," which a forged check is not. This creates potential liability for a bank if it charges you for a forged check. However, this liability may be shifted to you under certain circumstances.

If the forgery was caused by the customer's negligence, the bank may deny liability. When you receive a monthly bank statement, you are responsible for carefully reviewing the checks listed and promptly notifying the bank of any discrepancies (usually within 30 days, sometimes less). If you fail to do so, the bank may not allow you to recover the funds.

Even if you failed to review your bank statements in time, you may recover the funds if you can show that the bank was negligent in paying the forged check. In some cases, you and the bank may share the loss. If you prove that the bank did not pay the item in good faith, the bank is liable. However, even if the bank is at fault, if you do not report a forgery within one year after the bank statement, you cannot recover anything from the bank.

The best defense against check forgery is to be vigilant. Keep track of your checks and review bank statements. Even if you do not balance you checkbook, review the checks. If you see anything that looks unusual, alert your bank immediately.