We have a customer that came in with a tax refund check that was made to another individual and it was endorsed by the individual. The customer who was trying to cash the check also endorsed under the check holder's signature. We didn't cash it because the check was not made payable to him. The customer went down the street and another bank cashed it. So, now he is upset. The only way that we ever cash a third party check is if the individual to which the check is made payable to is physically with the account holder. Were we wrong to not cash the check?

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The only way that we ever cash a third party check is if the individual to which the check is made payable to is physically with the account holder.

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Your bank probably invested some money in developing that policy; i.e. you lost money by doing something else. You were very definitely not wrong in establishing or enforcing your policy.

Our policy is - We do not cash tax refund checks endorsed by third parties, the liability is too great.