The Concept of Agency

Posted on Posted in Business

 

Agency law holds that an agent is a person who is authorized and agrees to act for another person or entity (the principal) with regard to contractual arrangements with third parties.  Typically, agents are employed to find, negotiate and conclude contracts on behalf of the principal.  The establishment of an agency relationship requires that there must be manifestation by the principal to the agent that the agent may act on its behalf and consent on the agent’s part to do so.

 

In the insurance arena, agency is established when an insurer authorizes individuals (or businesses) to represent its policies and services to the public.  In so doing, the insurer and the agent have formed a relationship that operates in such a way as to create a legal position for the principal with regard to its rights and liabilities with third parties.  The actions of an insurer’s agents and the policies they place are legally binding on the insurer.

 

Authority:  Express, Implied or Apparent

The scope of an agent’s role in acting on behalf of a principal is a function of his or her authority.  Agency relationships – that is, an agent’s activities on behalf of the principal – operate in such a way as to affect or create a legal position for the principal with regard to its rights, responsibilities and liabilities with third parties.  Within most agency relationships, there are three levels of agent authority; all can bind the principal.  These levels of authority are express, implied and apparent.

 

Express authority (often referred to as actual authority) is the action and activity that the principal actually defines and extends to the agent; it is usually detailed in the form of a written contract.  Insurance agents are typically given the express authority to:

  • Solicit and accept applications for insurance;
  • Present and describe insurance policies to prospects and clients;
  • Explain the process through which applications are reviewed and coverage issued;
  • Collect initial premiums;
  • Promote the insurer and its products;
  • Provide post-sale service and follow-up.

 

Specific unauthorized acts are also often spelled out.  These might include, for example, changing the terms or conditions of the insurer’s policies or incurring any indebtedness on behalf of the company.

 

Implied authority is the natural extension of activity that is expressly granted; in other words, implied authority “fleshes out” the rights and actions expressly given, enabling the agent to perform his or her express authority.  For example, if an agent has the express authority to sell auto policies, he or she would have the implied authority to provide standard rate quotes over the phone.

 

Apparent authority is the appearance or assumption of authority stemming from the actions, words or deeds of a principal that would lead a reasonable person to assume that the agent has authority.  If the principal, intentionally or through negligence, allows an agent to perform acts for which he or her has no authority, apparent authority has been established and the principal has ratified the act by allowing it to occur.  The acts of an agent alone cannot establish apparent authority, but silence upon the part of the principal who knows that an agent is holding himself or herself out as vested with certain authority will bind the principal as fully as under expressed or implied authority.  A principal that has created an agency relationship through ratification will be estopped from denying the relationship exists.

 

Apparent authority is the appearance or assumption of authority stemming from the actions, words or deeds of a principal that would lead a reasonable person to assume that the agent has authority.  If the principal, intentionally or through negligence, allows an agent to perform acts for which he or her has no authority, apparent authority has been established and the principal has ratified the act by allowing it to occur.  The acts of an agent alone cannot establish apparent authority, but silence upon the part of the principal who knows that an agent is holding himself or herself out as vested with certain authority will bind the principal as fully as under expressed or implied authority.  A principal that has created an agency relationship through ratification will be estopped from denying the relationship exists.

 

The ethical responsibility that an agency relationship entails is of great significance.  Agents are empowered to act for and on behalf of their principals; in the public eye, they are often viewed as the company itself.

 

Fiduciary Responsibility to the Insurer

The relationship formed by a contract of agency creates a unique role for both agent and principal, which requires a level of fiduciary responsibility not assumed in other (arms length) commerce transactions.  For one thing, an agency relationship is viewed and serves to operate as a long-term relationship.  It is to support this continuing bond that fiduciary standards apply.

 

By definition, a fiduciary is one who stands in a special position of trust, confidence or responsibility in his or her obligations to others.  In an agency relationship, fiduciary duty is required of both parties.  For the agent, his or her fiduciary duties to the principal involve a number of responsibilities.  These include:

  • The duty of loyalty.  The agent is responsible to act for the benefit of the principal, in accordance with the principal’s mission and goals.  The fiduciary relationship precludes agents from profiting or deriving gain from any information the principal may have, beyond that which is stipulated in the agency agreement.
  • The duty of care and skill.  The agent is for taking care to see to the principal’s interest in the same way a reasonable or prudent person would take care of his or her own interest.
  • The duty of good faith and fair dealing.  The agent is responsible for living up to the trust that is inherent in an agency relationship including making beyond what would normally be expected in other business relations.  Certainly, this would preclude the agent from acting for more than one principal within the same transaction.
  • The duty to act only as authorized.  The agent should actively identify what obligations and authority he or she has with respect to the insurer’s interest, obtain the insurer’s agreement and act accordingly.  Agents should align their conduct to further the insurer’s interest, so long as that interest is legitimate, moral and ethical.

 

A producer owes his or her company a great deal.  The practical application of these fiduciary duties extends into many areas, legal as well as ethical.  As usual, the legal requirements are clear-cut; the ethical requirements are less so.

 

Practical Legal Applications of Fiduciary Duty

The legal applications of the agent’s fiduciary responsibility to his or her insurer are clear-cut.  Violations in this area tend to have severe legal implications, for both insurer and agent.  Recourse against an agent for violating the law includes license suspension or revocation, fines and even imprisonment.  In practice, an agent’s fiduciary responsibility to his or her insurer requires the following.

  • The duty of care.  Agents must exercise skill and diligence in order to avoid any negligent act that could open the insurer to liability.  For example, incorrect policy dates, erroneous limits of liability or omissions of endorsements have the potential to lead to trouble for both insurer and agent.
  • Proper use of premium monies.  Agents owe a fiduciary responsibility to their insurer to promptly and properly remit premium payments they have collected from or may be due to policy owners and to hold them in a segregated account set up for that purpose.
  • Proper and complete disclosure.  Insurers rely on their agents to collect and record the information that is used to assess and underwrite policies.  If the information provided to the insurer is incorrect or incomplete and it is material in the issue of a policy, the insurer will be liable for covering a risk it might otherwise have rejected.  In these situations, it’s possible for the insurer to sue its agent for negligence.  (This is illustrated below.)
  • Notification of cancellation of coverage.  Normally, agents do not have an obligation or the authority to cancel an insured’s coverage.  However, in the event that they have accepted some aspect of this responsibility, they may be liable.  For example, in one case (Mitton v.  Granite State Fire Insurance Co., 196 F.2d 988, 10 Cir.  1952), an insurer’s agent was instructed by the insurer to obtain a flood and landslide endorsement from an insured.  If the insured refused to accept the endorsement, the agent was to notify the company, which would then cancel the policy.  The agent did neither and was held liable to the insurer for the insured’s flood damage.

 

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