I think the subsidy category is for instrument of payment fraud where the claimant is an innocent victim. If the claimant gives you a plausible account of theft or loss of the cheque and you accept that they have acted in good faith, you might not be quick enough to stop the thief from cashing it. In a case like that, you take a generous view and regard it as theft from the authority or perhaps the bank, rather than theft from the claimant. You can then make a duplicate payment so that the claimant gets their benefit.
In a case where the claimant has already cashed the cheque himself/herself and someone then steals the money, it is more like theft from the claimant and most councils would probably not issue a further payment.
I think a fair comparison can be made with identity theft banking fraud – if someone cleans out my bank account while pretending to be me, the bank will accept that as theft from them, not from me, even if the thief got hold of my details from me and not the bank (by phishing for example) – as long as I was not negligent. But if I draw £100 out of a cash machine and someone mugs me as I am walking away, that’s theft from me and not from the bank.
I have never worked in payment control but I would assume that councils, just like ordinary citizens, would normally be able to persuade the bank to pick up the tab for ID fraud, including the cashing of stolen cheques. I don’t know a huge amount about the law on phishing etc but I have heard that the bank will reimburse the customer as long as the customer has not been negligent. Presumably this applies if the bank’s customer is a local authority too? I imagine the 25% subsidy is to cover the time and trouble involved in getting reimbursed, and also to cover those cases where the bank is not satisfied and declines to reimburse the council’s account.
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