The general rule is that the principal is liable to the third party for any act done by the agent which falls within the agent’s authority. In certain circumstances the principal is entitled to ratify the agent’s unauthorized acts, and thus is enabled to take advantage of them vis – a –vis the third party, though, if he does so, he himself becomes contractually bound to the third party.
In some cases the knowledge of the principal is deemed to be the knowledge of the agent, and vice versa.
A. THE AUTHORITY OF THE AGENT
1. The types of authority
Where the principal seeks, as against third parties, to take the benefit of an act done by another person on his behalf, the question whether the act was done with our without authority is of little importance, since an unauthorized act may, as a rule be ratified.
Where, however, it is a question of a principal’s liability to third parties, the existence, nature and extent of the alleged agent’s authority are material factors to be taken into consideration. The Principal will be liable to the third party if the act of the agent falls within :
His express or implied authority.
His usual authority.
His apparent authority.
(a) Express and implied authority
All acts falling, within the express authority of the agent bind the principal. There is express authority wherever the agent’s authority in terms applies to the act in question. Thus, where a broker is instructed to effect an insurance on behalf of a proposed assured, or an underwriter is authorized to sign policies on behalf of a syndicate, the principals are, in both cases, bound by any policy which is in accordance with the agent’s instructions. The assured is, therefore, liable to pay the premium,and the syndicate is responsible for any loss.
The principal is also bound by any act necessarily involved in the execution, of the agent’s express authority. Thus, an agent employed to effect an insurance on behalf of the proposed assured has authority to disclose all material facts to the insurers, and to describe the risk proposed to be insured; the proposed assured is, therefore, responsible for his agent’s non – disclosure or mis description . So also an agent employed to effect the insurance has authority to sign the proposal from and declaration on behalf of the proposed assured.
Thus, in Zurich General Accident and Liability Insurance Co. Ltd. v Rowberry
Brokers were instructed to effect a policy of insurance in respect of continental travel. By mistake they stated in the proposal form that the destination of the assured was Paris whereas it was, in fact, Nice. The assured refused to pay the premium on the ground that the policy which was issued covered travel between London and Paris only.
Held, by the Court of Appeal that the insurance company was entitled to the premium because the assured had given the brokers authority to negotiate a form of policy within the broad limits of the proposal form, which related to France, and that they were, therefore, entitled to nominate Paris as the destination.
An agent may be expressly authorized by the insurers to issue a cover noteor bind them to issue a policy to the proposer.
Again, where the agent of the insurers had authority to handle the accounts under a reinsurance treaty, it was held that he had authority to initial the accounts and thereby bind the reinsurers.
(b) Usual authority
Although an agent may have been given no express instructions by his principal, by the very position which he holds he may have a ‘usual authority’ to do certain acts.
Thus, in the case of the insurers, an agent may be employed to negotiate the terms of a proposal and to induce the proposed assured to make a proposal which the insurers are willing to accept By virtue of this employment, the agent has authority to explain the meaning of the questions in the proposal form; he may settle the terms of the proposal,or decide the limits within which disclosure is to be made, and he may even have authority to issue a cover note or to receive the premium. If he has authority to receive the premium, he may also have authority, on receiving it, to waive the breach of a condition. He may further, unless the policy provides otherwise, receive notice to determine the policy or notice of loss.
But an agent employed by the insurers to carry out the negotiations on their behalf, has, as a general rule, no usual authority to bind them to issue a policy, though he may have authority to issue a cover note. He has no authority to fill in the answers to the questions in the proposal form or to vary the terms of the contract, whether expressed in the cover note or in the policy. Similarly, an agent employed to receive premiums has no authority to give credit; even if he receives the premiums, he does not necessarily bind the insurance company either to issue,or renew,or, after lapse, to revive the policy.
Again, a local agent has no usual authority to waive a condition concerning the giving notice of loss to the head office of the company within a specified time.
Thus, in Brook v Trafalgar Insurance Co. Ltd.
A motor insurance policy provided that : ‘ Notice of any accident or loss must be given in writing to the company at its head office immediately upon the occurrence of such accident or loss… in the event of failure to comply with the terms of this condition and in particular, if within 7 days after such accident or loss has occurred, the company has not been notified as above set forth, then all benefit under this policy shall be forfeited.’ The assured’s car was lost by fire on 17th December, 1943. He reported the matter to Nelson, the company’s provincial agent, on 18th December, and was then supplied with a claim form. He completed it on 3rd January, 1944, and returned it to Nelson, who sent it to the Company.
Held by the Court of Appeal, that the claim was out of time, and that there was no evidence to show that Nelson had authority to waive the express condition of written notice having to be sent to the company’s head office.
In the Course of his judgment Scott LJ said:
‘The learned Judge [in the Court below] relied upon the fact that Nelson’s name is mentioned against the printed word “Agent” in the schedule to the policy. He treats that as mounting to conclusive evidence that Nelson had authority on behalf of the company to waive the express condition of written notice having to be sent to the company’s head office. In my view…. That would have been an erroneous inference. It is common knowledge to everybody that policies are issued at the instance of agents who procure the business and who get a small commission on the premium for doing so. That is the sense which prima facie the printed word “Agent” at the bottom of the policy bears; it appears there for the simple reason that it so serves as a record for the office files of the company as to who was the person entitled to commission. To suggest that the word ”Agent” in front of the name there gives the commission agent authority to take the place of the company and waive and express condition requiring that written notice should be sent to the head office the company when they have dozens of agents all over the country of that type, is, I venture to think, ridiculous.
An underwriter who is authorized to act on behalf of his syndicate may use this discretion as to what insurances he will accept on its behalf, and, therefore, policies signed by him in its name binds the syndicate as though he had signed them in the names of all members of the syndicate. He has a usual authority to settle the amount of a loss, or agree to refer a dispute arising under the policy to arbitration.
Directors or authorized offices of an insurance company or persons represented as such bind the company by their agreements to issue policies, and by the policies which they, in fact, issue in its name. They may waive a breach of condition or accept as satisfactory answers to questions which ought to have been deemed unsatisfactory. The usual authority even of these agents is, however, limited. Thus, they cannot bind the insurers by entering into a contract which exceeds the known limits of their authority, such as, for instance in the case of an insurance company, an ultra vires policy or, apparently, a parol contract of insurance.
But no usual authority is possessed by clerks and salaried employees of the insurers whose duty it is to perform merely ministerial acts, nor by persons who introduce business for a commission, and whose authority is limited to the transmission of proposals to the insurers. Thus, a person, who is merely employed to introduce business, has no power to bind the insurers by the issue of a cover note, or by the receipt of the premium, in the absence of an express authority to do so. Nor has he any authority to accept a proposal. The authority of such an agent may, however, be extended by the conduct of the insurers; thus, if they allow him to collect premiums and to deduct his commission therefrom before handling them over, he is their agent to receive premiums.
(‘c) Apparent authority
The principal will be bound when he has held out a person as his agent, and he will be liable to third parties for all acts which fall within the agent’s apparent authority.
In this case it is immaterial whether the agent exceeded his express authority, or whether he was never, in fact, an agent and had no authority to represent the principal at any time. Thus, an agent, who has been in the habit of receiving premiums on behalf of the insurers, may bind them by the receipt of a particular premium, and they may be affected with notice of the circumstances attending its payment. An agent entrusted with blank signed policies and renewal receipts may bind the insurers by any policy or renewal receipt which he fills in and issues. In accordance with the same principle, the insurers cannot repudiate an alteration indorsed on a policy by an agent which has been held out by them as authorized to indorse on policies alterations their terms
Again, where a person was appointed as chairman of a negotiation committee of reinsurers to settle disputes under a reinsurance treaty, it was held that, on the evidence, he had apparent authority to make a settlement which was binding on them.
Further, Lloyd’s Policy Signing Office has been held to have appeal authority to sign policies binding on underwriters as if they had signed to themselves.
An unauthorized act may, however, be repudiated by the principal provided that he acts promptly and before the position of the third party has been altered to his prejudice. Hence, the insurers cannot, after loss, rely on the fact that agent, in issuing the policy, had exceeded his express authority.
2. The termination of the agent’s authority
As far as the relationship between the principal and the agent is concerned, the authority of an agent may be withdrawn at any time.
But as far as third parties who have already dealt with him as an agent are concerned, his authority may, according to the circumstances, continue until they have received notice to the contrary. It is then immaterial whether the act done falls within the express or apparent authority, which the agent possessed before the withdrawal.
Thus, a policy signed on behalf of the insurers by an agent, who formerly had authority to sign policies on their behalf, binds them, though the authority had been withdrawn before it was signed, unless the assured had been notified of the withdrawal; and a notice of loss given to the agent through whom the policy was effected is, in the absence of a condition to the contrary, a valid notice, although the agent had, before the loss, ceased to represent the insurers, provided that the assured was not aware of it.
3. Where the act of the agent does not bind the principal
Any acts which fall outside the scope of the agent’s authority, either because the alleged agent has no authority to represent the principal or because his express the usual or implied or apparent authority does not extend that far, do not bind the principal.
Thus, a disclosure of a material fact to the solicitor acting for the insurers is not a disclosure to the insurers. Similarly, payment of the premium their agent, if not made in the proper form,or at the proper time, is not necessarily a payment to the insurers.
Again, an admission of liability made by the driver of a vehicle after an accident is not an admission of liability by an agent of his employer within the meaning of a condition in a motor insurance policy providing that the assured should not by his agent make any admission of liability, since the driver is not, in the absence of express authority, the agent of his employer to make admissions.
Further, where the principal had instructed his agent to insure some goods against war risks for 3 months, and the agent asked a firm brokers to insure them of ‘one or three months as obtainable’ and the insurance policy was not liable for the payment of the premium because the agent had acted without authority.
4. The effect of the agent’s fraud
An act which otherwise falls within the agent’s authority does not cease to bind the principal because it was done fraudulently. It is immaterial whether the agent was acting in his own interest and in fraud of the principalor for the supposed benefit of the principal.
If the principal successfully repudiates responsibility for the act on the ground that it was unauthorized, he must account to the third party for any benefit which he may have received, since he cannot benefit by his agent’s fraud and at the same time repudiate what the agent has done.
A breach of duty on the part of the assured’s agent in concert with the insurers confers rights on the assured rights on the assured as against them. Thus, insurers who have paid a secret commission to the agent of the assured, are liable to the insured in damages; the insured is entitled to claim the amount of the secret commission from the agent but cannot claim both damages and the secret commission and must elect between the two remedies.
Further, if the agent in concert with the insurers fraudulently makes a compromise of the assured’s claim, the compromise agreement can be set aside at the instance of the assured.
B. RATIFICATION
An act which does not fall within the agent’s authority, whether express, implied, usual or apparent, becomes binding on the principal if it is ratified. Ratification take place where the principal adopts the unauthorized act and makes it his own. It may be either express or implied from conduct, e.g. where he takes the benefit of the act with knowledge of the circumstances in which it was done.
It is immaterial whether the unauthorized act was done without authority by a person who was in no sense the agent of the principal at the time, or whether it was done in excess of authority by a person who was, at the time, his agent for other purposes.
1. Conditions necessary for a valid ratification
To constitute a valid ratification the following conditions must be fulfilled:
The person doing the unauthorized act must purport to do it as agent and not on his own behalf.
Thus, if a person effects an insurance in his own name, there being nothing to show the insurers that any other person is interested in the insurance, the insurance is personal to the person actually effecting it; such person cannot afterwards allege that he intended to insure on behalf of a principal, and the alleged principal cannot notify the insurance.
The principal purporting to ratify the unauthorized act must be the principal whom the agent had in contemplation and on whose behalf he intended to act.
The principal need not be named. it is sufficient if he belongs to a contemplated class. E.g. where an insurance purports to be on behalf of all persons interested or of those it may concern. A person falling within the description of the principal in the policy cannot, however, ratify it, if it appears that he was not such a person as the agent had in contemplation.
The principal must, at the time of the act alleged to constitute ratification, have full knowledge of all the circumstances relevant to the unauthorized actor, at least, must have waived further inquiry.
The principal must be in existence at the time when the unauthorized act was done.
This is important only in the case of limited companies and other corporate bodies. Thus, a policy issued by an agent on behalf of an insurance company before its actual incorporation cannot be ratified by the company afterwards. A new policy must be issued after the incorporation of the company.
The relationship between the principal and third parties.
The principal must, by law, be capable of doing the unauthorized act.
This is also is important only in the case of limited companies and other corporate bodies, whose powers are limited by their memorandum of association or other instruments constituting them. An insurance company which is formed for purpose, as defined in its memorandum of association, of carrying on special kind of insurance businesscannot carry on any other kind of insurance, business, unless it memorandum of association is first altered according to law. It cannot, therefore, ratify policies of insurance issued by its direct which do not fall within the scope of the memorandum of association so enforce them against the assured.
The principal must not be precluded by his conduct from ratifying the unauthorized act.
Thus, an unequivocal expression of determination not to adopt or to ratify to be bound by the act binds the principal.
2. The effect of ratification
The effect of ratification is that the act ratified is, in contemplation of law, act of a duly appointed agent, acting on behalf of the principal and pursuance of the principal’s prior instructions. The act, therefore, become the act of the principal, by which he is entitled to benefit and for which he responsible. Thus, an unauthorized insurance, when ratified by the assured by the insurers, as the case may be, becomes a valid insurance. The assured therefore, liable for the premium, and the insurers are liable for any loss which may subsequently happen.
Ratification after loss
Marine Insurance
In marine insurance, it is clear that an unauthorized insurance may be ratified even after the principal has heard of the loss. Ratification after loss is anomaly. It is to be regarded as an exception to the general principle that there can only be a ratification where the principal could at the time of ratification make the same contract as that ratified. At the same time the validity of a ratification after loss is established both by the authority of decided casesand by statute.Moreover, it has been recognized as a legitimate exception to the general principle, in as much as the loss insured against is very likely to happen before ratification, and it must be taken that an insurance effected subject to ratification involves that possibility as the basis of the contract.
Non – marine Insurance
The question of ratification after loss has also been considered in connection with fire insurance; and it may be assumed that, in the case of any other kind of insurance, the principles applicable to fire insurance will be followed rather than those which may be peculiar to marine insurance.
In the case of fire insurance, it will depend on the circumstances whether the loss can be ratified. Two types of situation are to be distinguished :
The person effecting the unauthorized insurance may himself be interested in the subject – matter.
ii. The person effecting the unauthorized insurance may have no interest in the subject – matter.
I Insurances by persons interested.
In many cases a person who has an interest in the subject – matter of insurance is