Key Takeaways

  • Implied authority is a legal concept allowing agents to act on behalf of a principal even without explicit written instructions.
  • In insurance, implied authority permits agents to bind coverage or negotiate policy terms based on industry norms.
  • Implied authority differs from express and apparent authority, but all can impact legal liability.
  • It can be limited or revoked by the principal through explicit action or notice.
  • Courts assess implied authority based on the nature of the agent’s role, customary business practices, and third-party expectations.

When attempting to define implied authority, it's important to understand the circumstances surrounding the case. At its core, this term refers to the authority of an agent who is acting on behalf of another entity or person. Someone who has implied authority will do everything necessary to perform his or her duties, within reason. 

Contract law permits someone with implied authority to create legally binding contracts on behalf of a company or another person. It's not likely that every detail of implied authority will be spelled out in a written contract. 

If you've ever spoken to an insurance agent over the phone, you've dealt with somebody who has implied authority. In this instance, the insurance company has granted implied authority to the agent so they may sell insurance on their behalf. Now, the agent has the right to contact prospective clients and arrange sales appointments. 

Express Authority

While implied authority does not spell out every last detail in a written contract, express authority does. Express authority refers to the specific powers given to an agent in a written or oral contract. Implied authority is assumed, as in the case of the insurance agent hired by an insurance company. Express authority, however, defines various components of an agent's authority in a written contract. 

When an agent acts with express authority, the scope of their liability is thoroughly outlined. This may make the agent and the company liable for the results of certain actions. However, since implied authority does not contain thoroughly written procedures, liability is less clear. 

Another example of implied authority is an employee who bears a name tag or a business card with a company logo. This person has implied authority. Potential clients or customers are going to assume that employee has the authority to act on behalf of the company, and they do. The same is true of an employee who is sent on behalf of a company to conduct repairs on a product. Even if that employee isn't wearing a uniform or name tag, they still possess implied authority. 

Implied Authority in Insurance

In the insurance industry, implied authority plays a crucial role in enabling agents to carry out tasks that are customary or necessary to fulfill their responsibilities—even when not explicitly authorized in writing. This includes answering customer inquiries, collecting premiums, or even initiating coverage under certain conditions.

For example, when an insurance company hires an agent, the agent may not have a contract that explicitly allows them to offer temporary coverage. However, if it is industry standard for agents to do so, the agent may possess implied authority to bind a policy temporarily until the formal documents are processed.

This principle protects third parties, such as policyholders, who reasonably assume the agent has the authority to act based on their conduct and role. Courts frequently uphold such actions if they are typical in similar transactions, especially when the insurer benefits from the agent’s conduct.

Removing Implied Authority

A company may remove implied authority from an agent at any time. This can be done in several different ways.

  • The company may amend the agreement or contract, removing implied authority.
  • The company may terminate the employee.
  • The company may discharge the employee of their obligations. 

Limits and Legal Risks of Implied Authority

While implied authority offers flexibility, it also presents legal risks for both the principal and the agent. If an agent oversteps their bounds—by, for example, committing the company to a policy term not typically permitted—the insurer may still be held liable if the policyholder relied on the agent’s conduct in good faith.

To mitigate such risks:

  • Insurers should clearly define the scope of agent authority in contracts.
  • Written notices should be issued when implied authority is withdrawn.
  • Training should emphasize what agents can and cannot do under implied authority.

Implied authority is not limitless. Courts assess whether the agent’s actions were reasonably necessary and customary, and whether the third party reasonably believed the agent had such authority.

Business Partners' Implied Authority

Business partners have the ability to act with implied authority on behalf of the company. These acts are considered binding, as long as they fall within the purview of normal, everyday business. Examples of actions taken under implied authority include:

  • Buying or selling products on behalf of a company
  • Accepting payments on behalf of a company
  • Accepting or issuing bills on behalf of a company
  • Starting a new lease on behalf of a company

Examples of what implied authority does not grant include:

  • Submitting a dispute to arbitration on behalf of a company
  • Relinquishing claims made by a company
  • Proceeding in a legal suit
  • Withdrawing from a legal suit
  • Admitting liability in a legal suit on behalf of a company
  • Purchasing property on behalf of a company
  • Entering into a new partnership on behalf of a company

Implied Authority vs. Actual and Apparent Authority

Understanding how implied authority contrasts with actual and apparent authority is critical:

  • Actual authority can be express (written or oral) or implied (assumed by role or necessity).
  • Apparent authority exists when a third party reasonably believes the agent has authority, based on the principal’s representations.
  • Implied authority, in contrast, flows from the agent’s position and what is reasonably necessary to fulfill their duties.

In insurance, all three types can exist simultaneously. For example, an insurance agent may have:

  • Express authority to issue certain policies,
  • Implied authority to answer questions or collect payments,
  • Apparent authority if the insurer’s branding leads clients to believe the agent represents them fully.

Apparent Authority

Another delineation from implied authority is apparent authority. This occurs when someone logically concludes that a person has the authority to act on behalf of a company. However, not every act performed under apparent authority is legally binding. 

Apparent authority is sometimes referred to as ostensible authority. This occurs when a principal employee's actions result in a third party believing the employee had authority where it was not implied or expressed. 

Let's say a customer calls a company to request a quote for a product. Let's say Georgina answers the phone. Georgina is only a cashier, not a customer service representative. But, the customer does not know this. Even though Georgina is neither trained nor authorized to discuss package pricing with customers, she chooses to assist the customer. When the customer arrives at the store to make the purchase, the company may be liable to uphold the oral agreement made between Georgina and the customer. 

Court Considerations in Implied Authority Disputes

When disputes arise over whether an agent had implied authority, courts evaluate several factors:

  • Nature of the agent’s role: Was the action typical of someone in their position?
  • Industry customs: Is the action common practice in the industry?
  • Third-party belief: Did the third party reasonably assume the agent had authority?

In insurance law, courts often favor policyholders when the insurer benefits from the agent’s actions and fails to clearly communicate limitations. However, if the third party was aware of the limitations or acted unreasonably, courts may find no implied authority existed.

Frequently Asked Questions

1. What is implied authority in insurance? Implied authority in insurance allows agents to perform tasks necessary to fulfill their duties, such as binding temporary coverage or accepting premiums, even if not explicitly written in a contract.

2. How can an insurance company limit implied authority? Insurers can limit implied authority by issuing clear written contracts, communicating changes promptly, and formally revoking certain rights when needed.

3. Is an insurance company liable for an agent’s unauthorized actions? Possibly. If the agent's actions fall within the scope of implied or apparent authority, the insurer may still be liable, especially if the customer reasonably believed the agent was acting on the company’s behalf.

4. What’s the difference between implied and apparent authority? Implied authority arises from the agent's duties and role, while apparent authority is based on the perception of third parties influenced by the principal’s behavior or representations.

5. Can implied authority exist without a written agreement? Yes. Implied authority often operates without a written contract, based on custom, necessity, and the agent’s expected responsibilities.

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