The agency contract will spell out clearly the express authority, which is granted to an insurance professional by the insurance company. The agency relationship, which binds the insurance company, can also be created by using implied authority, apparent authority and ratification.
Express Authority
This type of authority is the simplest to understand because it is specifically spelled out under the agency contract and granted to the insurance agent. An example would be giving the insurance agent authority to describe appropriate coverages.
Not many legal questions arise in regard to express authority. This type of authority is easily identified from the terms of the agency contract.
Implied Authority
One enters into the “gray” area of agency law when dealing with implied authority. An agent has authority to act on the insurance company’s behalf when he/she reasonably believes that such authority has been given. For example, the insurance company cannot possible list out all details of the express authority given to the agent. Thus, implied authority is evident. This authority is granted by the insurance company to the agent but is not written in the contract. Probably the best example of implied authority is the use of a conditional receipt. When the agent accepts a check from an applicant for insurance, he/she is binding the carrier to make every effort, within reason, to insure the applicant.
Apparent Authority
This authority creates a legal minefield for both the agent and the insurance company. The best way to explain the abuse of apparent authority is to use an illustration.
Agent Herb works for the Prairie Mutual Life Insurance Company for four months. Due to lack of production, agent Herb’s contract is terminated. Agent Herb keeps all company materials. Agent Herb sells a policy to Hal. Hal relies on the apparent authority placed in Herb by Prairie Mutual.
Ratification
At times, insurance professionals sell products which they are not licensed to sell. In these situations, the insurance company is not obligated to honor the insurance professional’s acts. However, if the company does issue the policy, this is called ratification. Ratification is simply the validation of an unauthorized act.
Ratification needs five elements:
1. The person (insurance professional) who performed the act must have purported to act on behalf of the principal (the insurance company).
2. The insurance professional must have represented himself/herself as an agent of the insurance company.
3. The client must have believed he/she was dealing with an authorized agent of the insurance company.
4. Only the principal in whose name the action was taken can ratify the agents action.
5. The principal must ratify the entire transaction not just parts.
Four Legal Implications of Agency
The agency contract between an agent and an insurance company includes four legal implications.
1. The agent represents the interests of the insurance company. This means that the agent’s legal responsibility and obligation are to the insurance company not to a potential client. We will discuss these agent obligations a bit later.
2. The agent is given power to act on behalf of the insurance company. The agent can create legal liability for the insurance company under the insurance contract.
3. The acts of the insurance agent are considered acts of the insurance company. When a debit agent collects premiums, this is considered collection by the insurance company.
4. Knowledge of the insurance agent is considered to be knowledge of the insurance company. If the agent has knowledge of health matters pertinent to the issuance of insurance, it is assumed that this information is also available to the carrier.
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