Answer:
First, let's be clear on one thing -- a customer does not have a stop payment right on a cashier's check, except in New York, where that state's version of the UCC refers to a stop payment procedure for official checks. If the issuing bank refuses payment on its cashier's check, except in very limited cases, the bank will be liable not only for the face amount of the check but also damages and other expenses related to obtaining payment if the check is presented for payment by a person entitled to enforce payment.
There is a special provision in the UCC of 49 states (SC is the exception) that provides a procedure for claims in the cases of lost, stolen or destroyed cashier's, teller's and certified checks. In 48 states, that provision is found in section 3-312 of the UCC. In New York, it's found in section 4-403. Review your state's version of section 3-312 (or 4-403 in NY). You as issuing bank are entitled to enforce a waiting period of 90 days from the date of the cashier's check, during which you remain liable to pay the original check if it should be presented. At the end of the 90 day period, you can honor the claim if it is filed correctly, and be protected from having to pay the original check if it shows up later (in which case you would return it "Paid under 3-312 Claim").
Theoretically, your bank could also reissue the check without the protections of section 3-312. That would be the case if you are in South Carolina, or are doing so before the maturity of the claim under 3-312. In such a case, you might try requiring that the claiming party provide an indemnity bond to protect you. However, indemnity bonds for such cases are very hard to obtain and quite costly, I am told. Unless, of course, the customer can produce the evidence -- the pieces of the ripped-up check.
First published on BankersOnline.com 1/2/07
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