Common Law & Concept of Agency

Common law is that body of English law and concepts that grew out of the English judicial system.  It was this law -- based principally on the decisions and opinions of law courts -- that became the law in the English colonies.  Augmented by legislation, that common law constitutes much of our current system of laws.  An important concept derived from common law is the concept of agency.

 It is the law of agency and the agent's contract with represented insurers that determine whether the individual is an agent of the company.  The law of agency binds a principal by the authorized actions of the agent.  Since only authorized acts of the agent can bind the company, it is important to gain an understanding of how this authority is conferred on the agent.  The three types of authority that may be given to agents are:  

Express authority
Implied authority
Apparent authority  

The methods by which the agent gains these types of authority are different from one another.

Express Authority

Express authority is contractual-given authority.  It is given to the agent through his or her contract with the insurer and any amendments made by the company to that contract.  It is specific to the extent that it details the authority of the agent and outlines his or her duties.  Clearly, if the agent does only what he or she is given express authority to do, those actions would bind the company.  As a result of this specificity, few compliance problems arise out of express authority.

 Implied Authority

Implied authority is quite a different matter.  Authority is implied when it:

is intended to be given by the insurer,
usually relates to the general customs of the business,
is not contractually provided, and
is not specifically delineated.

Unlike express authority, implied authority comes from the powers that the company customarily gives its agents rather than from the contract between the agent and the insurer.  An example of implied authority can be seen in the insurer's giving the agent the express authority to solicit applications for life insurance on its behalf; by giving the agent that express authority, it also gave the agent the implied authority to telephone prospects on its behalf to arrange sales appointments.  

It isn't this kind of implied authority, however, that generally turns into significant insurer liability.  Instead, it is the insurer's liability for agents' behavior if the company knowingly or negligently permitted its agents to engage in unethical sales practices.  By the insurer's failure to stop the agents' unethical sales practices, a plaintiff could maintain that the company gave the agents implied authority to act in that fashion.  To the extent that the insurer authorized that conduct -- in this case through implied authority -- it is responsible for it just as though it had specified that activity in the agent contract.  If the insurer is deemed to have conferred that implied authority, the company could be held liable for any damages resulting from those acts.  Implied authority has provided the legal basis for some of the successfully -- maintained lawsuits alleging unethical marketing practices.

Insurers, in order to limit their liability, generally provide considerable direction to their field force as to permitted sales practices and advertising.  Although implied authority creates many of the insurer's liability concerns, the type of authority that causes most of the compliance problems is the last type: apparent authority.  

 Apparent Authority

Apparent authority is authority that:

is not provided by contract,
is not intended by the insurer, and
appears to the client to be given to the agent based upon the agent's believable statements.

Apparent authority reasonably appears to the client to be given to the agent, and this apparent authority may make the company liable for the agent's unauthorized acts.  Not unexpectedly, it is apparent authority that causes the majority of the liability for life insurers.

Even if the agent has none of those three types of authority, it is still possible for an insurer to be liable for the agent's acts.  That outcome may result from the insurer's ratification of the agent's acts.


Ratification is the confirmation or approval of an agent's actions by the principal.  The four elements necessary for ratification are as follows:

the agent must have represented himself as an agent acting on behalf of the insurer;
the customer must have believed the agent's representations;
the insurer must subsequently have validated the agent's actions by ratifying them in some fashion; and
the insurer must have ratified the entire agent transaction.

It should be clear that agent actions may create both personal liability and insurer liability. It is principally the mitigation of that insurer liability that has caused much of the current emphasis that insurance companies have placed on compliance.  Despite the fairly clear concepts that may result in liability, the issue of liability is anything but straightforward.  In fact, there are a number of other elements that affect liability.