The Law of AGENCY

Before we commence this section, it is very important to realise that the law of agency is much wider than its application to insurance agents (important as that is). Therefore, in the following paragraphs, do not think only of insurance agents. The comments apply to every kind of agent (a shipping agent, an estate agent, etc.), an explanation of which immediately follows.

(a) An agent in this context is a person who represents a principal. In insurance, the position is made a little complex because insurance intermediaries may be described as Insurance Agents (usually representing the insurer) or as Insurance Brokers (usually representing the insured/proposer), as the case may be. Within the law of agency, they are both agents.

(b) The law of agency is deceptively simple in theory, but sometimes quite complex in practice. Essentially, this whole area of law is governed by the legal principle that ‘he who acts through another is himself performing the act’. In other words, the principal is bound (for good or ill) by the authorised actions, and sometimes even the unauthorised actions (see 2.2.2 and 2.2.3 below), of his agent. Thus, when a child (agent) buys something on credit from a grocery store at his mother’s (principal) bidding, a contract of sale is created between the store and the mother so that she becomes liable to pay the price.

(c) The principal who becomes bound by the acts of his agent is exposed to vicarious liability, liability incurred as a result of an act or omission of another.

Definition
Agency is the relationship which exists between a Principal and his Agent. Because it is a relationship, it may arise as a matter of fact rather than as a precise agency appointment. In legal terms, an agency relationship may be deemed to arise in certain given circumstances.

The law of agency are those rules of law which govern an agency relationship. The law of contract also has to be considered as the agent often arranges an agreement with the third party, or performs it, on behalf of his principal. There are two contracts to consider:

(a) one between the agent and the principal; and

(b) another quite different one between the principal and the third party.

Note: an agency can exist without an agency contract. For example: a child (gratuitous agent) goes to buy a pack of sugar on behalf of his mother (principal), with authority to bind the mother in so doing, which is not granted under a contract of agency between them (remember that a domestic arrangement generally does not constitute a contract).

How Agency Arises
When we say that an agency relationship exists between two parties, we are, in essence, saying that the agent owes certain duties to the principal and vice versa, and that the agent has some sort of authority to bind the principal in respect of some contract or transaction to be made on the principal’s behalf with another person (third party).

There are a number of ways in which an agency relationship may arise. These we consider below:
(a) By agreement: whether contractual or not; express, or implied from the conduct or situation of the parties.
(b) By ratification: Ratification is the giving of retrospective authority for a given act. That is to say, authority was not possessed at the time of the act, but the principal subsequently confirms the act, effectively backdating approval. It can be done in writing, verbally, or by conduct.

For example, an insurance agent who is only authorised to canvass household insurance business for an insurer has an opportunity to secure an attractive fire insurance risk and purports to grant the required fire insurance cover to the client. The proposed insurance contract is technically void for it has been made without authority from the insurer. However, the insurer may subsequently accept the insurance and confirm cover so that the contract becomes valid retrospectively.

Authority of Agents
The issue of authority is related to, but distinct from, the issue of agency relationship. Where a certain act done by A purportedly on behalf of B will be binding on B, A is said to have B’s authority to do it; but that does not necessarily mean that there is an agency relationship, or a full agency relationship, between them, which will, for instance, entitle A to reimbursement by B of expenses incurred on behalf of B. The various types of authority that an agent may have are considered below:

(a) Actual authority: The authority of an agent may be actual where it results from a manifestation of consent that he should represent or act for the principal, expressly or impliedly made to the agent himself by the principal. An actual authority can be an express actual authority or an implied actual authority. An express actual authority is an actual authority that is deliberately given, verbally or in writing. By contrast, an implied actual authority arises in a larger variety of circumstances; put simply, it may arise out of the conduct of the principal, from the course of dealing between the principal and the agent, or the like.

(b) Apparent authority: The authority of an agent may be apparent instead of actual, where it results from a manifestation of consent, made to third parties by the principal. The notion of apparent authority is essentially confined to the relationship between the principal and a third party, under which the principal may be bound by an unauthorised act of the agent of creating a contract or entering into a transaction on behalf of the principal. Suppose an underwriting agent has been expressly forbidden by his principal from accepting cargo risks destined for West Africa. In contravention of this prohibition, the agent has on several occasions verbally granted temporary cover to a client for such risks purportedly on behalf of the principal, each time followed by issuance of policies for them by the principal to the client. Because of such past dealings, future similar acceptance by the agent may be binding on the insurer on the basis of apparent authority to the agent.

(c) Authority of necessity: In urgent circumstances where the property or interests of one person (who may possibly be an existing principal) are in imminent jeopardy and where no opportunity of communicating with that person exists, so that it becomes necessary for another person (who may possibly be an existing agent) to act on behalf of the former, the latter is said to have an authority of necessity so to act and becomes an agent of necessity by so acting even though he has not acquired an express authority to do that. The implications are that: by exercising such an authority, the agent creates contracts binding and conferring rights on the principal, and becomes entitled to reimbursement and indemnity against his principal in respect of his acts. Besides, he will have a defence to any action brought against him by the principal in respect of the allegedly unauthorised acts.

For example, when a person is very ill in hospital, a neighbour and friend volunteers and gives help, by assisting with domestic arrangements at his home. This includes payment of the renewal premium for his household insurance. As a result, he will probably be unable to refuse repaying the neighbour for the premium, as the neighbour will almost certainly be considered an agent of necessity. Secondly, he will probably be unable to declare the insurance void and demand a return of premium from the insurer. Thirdly, it is unlikely that the insurer will be able to deny claims under the policy on the grounds that the policy was renewed without his authority.

(d) Agency by estoppel: Where a person, by words or conduct, represents or allows it to be represented that another person is his agent, he will not be permitted to deny the authority of the agent with respect to anyone (third party) dealing with the agent on the faith of such representation. Despite the binding effect of the acts of the agent done in such circumstances, this doctrine, agency by estoppel, does not generally create an agency relationship unless, say for example, the unauthorised act of the agent is subsequently ratified. In other words, the operation of this doctrine only concerns the relationship between principal and third party.

Note The doctrine of apparent authority is distinct from the doctrine of estoppel. The first doctrine applies where an agent is allowed to appear to have a greater authority than that actually conferred on him, and the second doctrine applies where the supposed agent is not authorised at all but is allowed to appear as if he was.