Agency can be defined as the relationship that results from the manifestation of consent by one person or entity (the principal) that another party (the agent) will act on the principal�s behalf. The agent is subject to the principal�s control. There must also by a manifestation of consent to the agency by the agent.

Almost any person can be an agent. A person is not required to have contractual capacity in order to act as an agent. For example, a minor who cannot sign a binding contract for himself or herself can still serve as an agent and may sign a binding contract for his or her principal. However, only a person or an entity with contractual capacity to perform a certain act may act as a principal and appoint an agent. Thus a corporation may be a principal but a partnership may not. One who appears to be an agent of a partnership is at best an agent of the partners themselves.

These general rules of agency law are modified when applied to the life insurance business. For example, life insurance agents must be of a certain minimum age, have contractual capacity, and be licensed by the state.

In the case of a life insurance company, the agents�in the legal sense�include the directors (acting as a body), the officers, home office supervisory personnel, agency supervisors, and soliciting agents. In the business sense, only agency field supervisors and soliciting agents are regarded as agents. In this chapter the term "agent" will be used in its broader, legal meaning, with the expression "soliciting agent" used to designate field sales personnel. Most waiver situations involve actions of soliciting agents.

The following four general rules of the law of agency are particularly relevant to life insurance:

There is no presumption that one person acts for another. There must be some tangible evidence of an agency relationship. Thus if a person claims to represent a certain life insurance company and collects a premium with which he or she later absconds, the company is not responsible for that person�s actions if it has done nothing to create the presumption that the person is its authorized agent. If, however, the company has by its conduct permitted the person to have the appearance of an agency relationship (such as leaving that person in possession of company property, application blanks, and receipt forms), a presumption can be raised that the person is in fact representing the company. (The presumption can be overcome by proof that the company materials were improperly acquired.)

Note that agency must be created by the principal. It cannot be created unilaterally by the purported agent.

The scope of authority for an agent�s actions can be considerably broader than one might expect. There are three types of agency authority:

Most agency relationships are evidenced by a written instrument that expressly confers certain powers on the agent; it may also expressly withhold certain powers. A life insurance company�s agency contract usually authorizes the field representative to solicit and take applications for new business, arrange medical examinations, and collect first-year premiums. It also sets forth a number of powers specifically denied the agent, including the right to make, alter, or discharge a contract; to extend the time for payment of premiums; to accept payment of premiums in other than current funds; to waive or extend any obligation or condition; and to deliver any policy unless the applicant is in good health and insurable condition at that time.

The agent�s contract for one insurer, for example, provides that the company authorizes the agent to solicit applications for its insurance products. The contract then prescribes a substantial list of limitations on that authority as follows:

Another insurer uses this coverage to limit the scope of authority granted by its agent�s contract:

An agent�s power to bind his or her principal, however, may well exceed the scope of the principal�s express authorization. This is because express authority is construed to convey authority to perform all incidental acts necessary to carry out the agency�s purposes. Such acts fall under the heading of implied powers. For example, if an agent is expressly authorized to deliver a life insurance policy that can be properly delivered only upon the payment of the consideration, the agent has the implied power to collect the amount due and issue a receipt.

An agent�s authority can also be expanded by conduct of the principal or agent that creates a justifiable belief by third parties dealing with the agent that he or she possesses powers that have not been vested in the agent and may�unknown to the third parties�have been expressly withheld by the principal. If third parties can prove that they were justified in relying on the presumption that the agent was acting within his or her authority, the principal will be estopped (precluded) from denying that the agent had such powers. In proving justifiable reliance, third parties need to demonstrate only that they exercised due diligence in ascertaining the agent�s real authority. Authority created in this manner is referred to as apparent authority.

The doctrine of apparent authority can be illustrated by this example: An agent has habitually granted his or her policyowners extensions of time to remit premiums. Because the company has not taken action to deal with this infraction of its rules in the past, it would be precluded from denying that the agent had such authority until it notified the policyowners involved of the limitations on the agent�s powers. The company�s action with regard to one policyowner, however, would not create any presumption as to the agent�s power to deal in a similar manner with other policyowners.

The principal is responsible for all acts of its agent when the agent is acting within the scope of express, implied, or apparent authority. This responsibility embraces wrongful or fraudulent acts, omissions, and misrepresentations, provided the agent is acting within the authority granted or implied by the principal. The principal is likewise responsible for any libel committed by an agent in the pursuit of his or her official duties. While there is no unanimity in the decisions, the weight of authority is that�in the absence of restrictions�a company is liable not only for the acts of its agents, but also for the acts of the subagents and employees to whom the agent has delegated responsibility. The liability of the company in such situations may depend on whether it has given the agent actual authority, or its actions have created an apparent authority, to delegate responsibility.

Secret limitations on the agent�s authority are, under the doctrine of equitable estoppel, inoperative as to third persons. They are, of course, effective between the agent and the principal, and if the agent exceeds the actual authority given, he or she will be liable to the principal for any loss or damage. The agent, as might be expected, will also be liable to the principal for any loss or damage caused through the agent�s fraud, misconduct, or mere negligence.

In the course of their daily business, insurance agents are frequently asked to express their opinion about the meaning of a particular provision. The general rule is that no legal effect is to be given to such opinions. This holding is based on the theory that an agent�s opinion as to the meaning of any section does not create new obligations or modify old ones. This rule is followed particularly when the agent�s authority is limited and the provision involved is clear and unambiguous. In certain jurisdictions, however, a company is bound by its agents� opinions, especially when the opinion is not inconsistent with the language of an ambiguous clause in the policy and the agent�s opinion is relied on by the insured.

The agent�s knowledge about matters within the agency�s scope is presumed to be knowledge of the principal. This rule is applied even though matters coming to the agent�s attention are not, in fact, communicated to the principal. This rule is of critical importance, since in all their dealings with prospective and actual policyowners, soliciting agents and medical examiners are regarded to be the legal agents of the company. Hence loyalty to the company, as well as common decency, demands that field representatives communicate to the company all matters of underwriting or other significance that come to their attention.

Limitations on an agent�s powers are generally effective when the limitations have been properly communicated and do not conflict with existing law. All companies communicate to their policyowners through a clause in the application blank or in the policy (or both) the customary limitations on the powers of soliciting agents and other company representatives with whom the policyowner may come in contact. This provision, generally referred to as the nonwaiver clause, usually states that only certain specified representatives of the company (executive officers) have the power to extend the time for payment of a premium or to modify the terms of the contract in any other respect. The clause further requires that any modification of the contract must be evidenced by a written endorsement on the contract. For example, such a provision might read as follows: Only our President or one of our Vice Presidents can modify this contract or waive any of our rights or requirements under it. The person making these changes must put them in writing and sign them.

A nonwaiver clause will not be enforceable against acts or statements occurring prior to the policy�s issue unless it is contained in the application and the application is attached to the policy. In other words, the applicant cannot be presumed to have knowledge of a limitation in an instrument that comes into his or her possession only after the transaction has been consummated. On the other hand, the assumption follows that limitations on the agent�s authority contained in the application or the policy are effective with respect to acts occurring subsequent to delivery of the policy. Unfortunately for the insurance companies, experience has not always borne out this assumption.

An insurance broker is a person (individual, partnership, or corporation) who acts as an agent of the insured in negotiating for insurance and in procuring the issuance of an insurance contract. In the eyes of the law, the broker is requested by the prospective insured to act for him or her, although in practice, the "request" is usually solicited by the broker. The broker usually receives all his or her compensation (in the form of commissions) from the insurance company, delivers the policy for the company, and collects the premium from the insured. As a consequence, the broker has come to be regarded as the agent of the company for the purpose of delivering the policy and collecting the premium. In fact, this status is recognized by statute in some states.

When the broker is regarded as the agent of the company only for these limited purposes, the broker�s knowledge as to facts affecting the risk is not imputed to the company for the purpose of establishing a waiver or estoppel or for the purpose of obtaining reformation of the contract on the grounds of mistake. In most states, however, there is legislation that provides that any person who solicits insurance for anyone other than himself or herself and procures a policy from the insurer will be deemed the agent of the insurer with respect to that policy.