Types of Endorsements of Negotiable Instruments

All negotiable instruments have an endorsement that transfers the ownership rights in the instrument to another person or institution. Usually the endorsement is written on the back of the instrument. There are four types of endorsements.

A blank endorsement does not specify a particular endorsee or owner and can consist of a mere signature from the payor to be valid. Blank endorsements are bearer instruments. In other words, anyone who signs the endorsement may cash it. For this reason, blank endorsements are more susceptible to theft than are other instruments. Thus, blank endorsements are often converted to special endorsements. A special endorsement has the signature of the endorsing party, which identifies who can receive the funds when different from the one to whom the instrument was originally made out. A qualified endorsement is used when passing title to another and allows the endorser to disclaim any liability, or responsibility, for payment on the note, usually by adding the language "without recourse" to the endorsement and signature on the instrument. This protects the endorser, as they are not guaranteeing that the instrument will be honored.

For example, suppose that Adam Simpson endorsed a check by writing on the back, "Pay to Ivy Johnson without recourse." Ivy presents the check to the bank, but the check bounces. In other words, there are not enough funds in the account to pay Ivy. Ivy cannot go after Adam for any recourse, as he made it clear by adding the "without recourse" language that he was not guaranteeing the instrument.

Qualified endorsements are mostly used when the endorser is acting as a representative. For instance, an insurance agent may receive a check payable to them directly that should be written as payable to the agent's employer. The agent can use a qualified endorsement to sign the check over to their employer without running the risk of being responsible if the check bounces.

A restrictive endorsement requires the endorsee to comply with certain instructions. The most common restrictive endorsement is the phrase “For Deposit Only” written along with the payee's signature on the back of a check; with this restriction on the endorsement, the bank will only deposit the check and not give any cash back to the check bearer.