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Chapter 3 Contract and agency 3/9

G6 Consequences of an agent’s actions

The consequences of an agent’s actions on the principal will depend on the particular circumstances
and the extent of the agent’s authority.
G6A Actual authority

As we have already seen, authority may be express (through the terms of an agency agreement) or
Actual authority may
implied (if an agent has to carry out a certain action to carry out express instructions they will have be express or implied
implied authority to do so).
G6B Apparent (ostensible) authority Chapter

It is unlikely that a third party will know the extent of an agent’s authority nor be in a position to make a 3
judgement, so the situation is catered for in law by ‘apparent’ authority. There are different situations in
which it may arise in an insurance context, but in general we can say that if an agent has never been
appointed but claims to act on behalf of a principal, this will not create a binding contract with the
principal. It requires the principal’s conduct to indicate that the agent is acting on its behalf.
However, an agent may have been validly appointed, but may not be permitted to carry out certain tasks.
In this case, to determine if a contract is valid, the action carried out by the agent is considered as to
whether it is normal for that trade or profession. Let us consider this further using an insurance example.

Example 3.4
Let us assume that an insurer has provided an intermediary with a motor cover note book and an agent’s guide as to
the type of risks that may be accepted.
The intermediary provides a client with a quotation for motor insurance and issues a cover note on behalf of the
insurer. The client assumes the intermediary has the authority to perform these functions as they are usual for the
profession. If the intermediary indicates acceptance of the risk, but for some reason it is beyond the authority limits
granted by the insurer, a valid contract would still be created.

It is important to recognise that, even if the actions of an agent bind the principal to the contract, if the Reference copy for CII Face to Face Training
agent is acting outside its authority, the agent will be liable to the principal for its actions.

G7 Termination of agency

An agency may be terminated in a number of ways. The most common are by:
• mutual agreement by the principal and the agent;
• the agency being terminated by either the principal or the agent; or
• the death, bankruptcy or loss of mental capacity of either party.
Consider this…
One of the major problems in insurance is how the cancellation of an agency can be brought to the attention of all
existing and possible future third parties.
Think of some reasons why the cancellation of an agency could cause problems for an insurer.

It is important that all relevant parties are notified by the principal when an agency is terminated.