Agency Theory and Insurance Law
Prof. Bill Long 1/31/05
Three of the cases I assigned to you (Tallant, Roseth and Paulson) speak to one degree or another of the authority of the insurance agent to bind the principal (the insurer) with respect to the insured. This is a particularly thorny problem for insurers. On the one hand, they need agents to get clients. If they wanted to remove all authority from agents with whom they contract, there would be no reason to have agents. On the other hand, if they delegate all authority to recruit clients to agents, then are they bound when the agent goes beyond his/her authority in making representations to clients? There is no satisfactory resolution to the dilemma. The way that courts have tried to negotiate the thicket is to distinguish between the agent's actual and apparent authority. This distinction especially comes in for comment in Tallant.
The Actual/Apparent Authority Distinction
One court, cited by Jerry in his treatise on Understanding Insurance Law, defined the difference as follows:
"There are two main kinds of agency, actual (express) and ostensible (apparent). If there is evidence that the principal has delegated authority by oral or written words that authorize the agent to do a certain act or series of acts, then the authority of the agent is express...If there is no such express authority, or if intent to create such authority cannot be implied from the actions of the principal and agent, then the question is whether there is apparent agency...'The ostensible agent is one where the principal has intentionally or inadvertently induced third persons to believe that such a person was its agent although no actual or express authority was conferred on him as agent (Gulf Ins. Co. v. Grisham, 613 P2d 283, 286 (Ariz. 1980))."
Thus, actual authority is defined by statute or, usually, by contract. Apparent authority does not exist simply because a person "acts" like an agent. Rather, some sort of affirmative conduct or acquiescence on the part of the principal is necessary for this to happen. Apparent authority therefore flows from actual authority, though it may sometimes exceed the scope of the actual authority committed to an agent. When the agent is going beyond the scope of his/her actual authority and acting with apparent authority, his/her actions still bind the insurer, though the insurer then has an action against the agent for indemnification (usually such a provision is in the contract between agent and principal) and the insured has an action against the agent for negligent failure to procure coverage (Abraham, p. 62). The Tallant case, despite its procedural complexity, explores these issues fairly well (pp. 58-62).
Multiple Contract Documents
A similar kind of problem is created when you have different facts, that is, when the "middleman" or "group representative" is not a licensed insurance agent but an employer or labor union or even a religious group that secures insurance for its members. The problem of who the "middleman" works for (the employees or the insurer) in the insurance relationship is a vexed one. There will be a contract between the insurer and group representative (a "master policy") and then there will be the individual insurance certificates given to each insured. Typically the master policy is a long document, while the individual certificates summarize the "high points" of coverage for the individual employee or member.
Problems arise, however, in considering who the group representative actually represents. If it is viewed as the insured's agent, it follows that knowledge of the terms of the policy is imputed to the individual insureds. However, if the representative is primarily seen as the agent of the insurer, then the insured is not expected to be privy to the relationship between representative and insurer. Though courts will try to lay down an overarching rule at times, normally the question of whether the representative/middleman is the insurer's or the insureds' agent is a factual inquiry. In this regard, the Paulson case, which originated in Salem, has possibly the best statement of the issue. Justice Peterson said:
"Our analysis of the decisions convinces us that many courts, even though they purport to apply a 'majority rule' or a 'minority rule,' actually base their decision upon the facts relating to the division of functions between the insurer and the employer-policyholder, and that any 'majority' or 'minority' rule is more apparent than real. It is more correct to say that when the plan is exclusively administered by the insurer, as a matter of law no agency relationship exists between the insurer and the employer. But if the employer performs all of the administration of the policy, an agency relationship exists between the insurer and employer, as a matter of law. Between these two extremes, as the division of functions becomes less seaparate, or to put it another way, as the employer assumes responsibility for more administrative or sales functions which are customarily performed by an insurer, a question of fact will arise as to the agency relationship between the insurer and the employer (636 P2d at 949)."
Some questions that will sharpen the analysis in any specific case are: Who pays the premiums (individual or company) and how are they paid (to the employer? directly by the employee to the insurer? by payroll deduction and then a check to the insurer from employer?)? Who tells the employee the rules about signups, claim procedures, etc? Where should the employee go for information about the meaning of the policy and its coverage? What should or did the group representative say about its responsibility for the policy? If there is a training session on the policy, who led the session? These are not foolproof questions, but they get you thinking about the test laid out by Justice Peterson regarding who performs which functions in implementing the insurance coverage.
Conclusion
As you are no doubt noticing at this (late) stage of your legal education, factual inquiry is often the order of the day. Be aware not just of the legal documents controlling a transaction (statutes and contracts) but of the actual way that a system works. Often courts will be more interested in the latter than the former.
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