What is indorser warranty of a negotiable instrument?
An indorser of an instrument makes warranties to the maker or drawer of an instrument and to subsequent holders of the instrument. Assurances to the marker or drawer include:
- Good Title – She has good title to the instrument,
- Forgery – She has no knowledge of forgery, and
- Materially Altered – The instrument is not materially altered.
An indorser warrants to a subsequent holder that:
- Good Title – She has good title,
- Signatures – All signatures are genuine,
- Alterations – The instrument is not materially altered,
- Defenses – There are no known defenses against payment of the instrument, and
- Insolvency – There is no knowledge of the maker or drawers bankruptcy.
Liability for a failure of these assurances is known as indorser liability. The difference between indorser warranties and transferor warranties is that any good-faith holder of the note may enforce these warranties against any indorser. Recall, transfer warranties are limited to the immediate transferor. Indorser warranties make the indorser (signor) of an instrument secondarily liable to a holder. That is, the indorser is liable to pay an instrument that has been dishonored. An indorser who pays the instrument is left to seek reimbursement from a prior indorser or anyone who transferred the instrument to her.
Note: Indorser liability can be disclaimed by the indorser at the time of indorsement. Generally, the disclaimer must be noted on the instrument. Disclaimer is not available for checks. The maker or drawer of a note or draft does not incur indorser liability or transferor liability. These individuals are primarily liable on the instrument.
