Can An Unauthorized Agent Bind The Insurance Company?

The above questions get some attention in a 1994, Texas Supreme Court opinion styled, Celtic Life Insurance Co. v. Coats.

The insured’s owner met with a soliciting agent of Celtic to discuss buying insurance.  The owner advised the agent that he wanted a policy providing benefits for psychiatric care equal to or better than the $20,000 coverage provided by the company’s then existing policy.  The owner explained to the agent that the coverage was needed because his oldest son had previously required psychiatric care, and he was concerned that his younger son might well require similar care.  The agent said he understood.  The agent then proposed the purchase of a specific policy written by Celtic with a maximum lifetime hospital benefit of $1,000,000.  However, the agent did not point out that the psychiatric benefits under the policy were limited to $10,000.  The insured’s business manager noticed the $10,000 limit and questioned the agent about its meaning.  The agent assured the business manager that the $10,000 limit applied only to the out-patient psychiatric care.  The policy was purchased.

Subsequently, the owner’s son was admitted to the hospital for psychiatric care.  The insured filed a claim and was assured by the agent that the in-house hospital treatment was covered.  Celtic, however, paid only $10,000 of the $27,000 in medical expenses.

The insured sued for violations of the Texas Insurance Code and the Texas DTPA.  The jury found that the agent had made misrepresentations concerning the benefits provided by the policy and that the agent had authority to to explain policy benefits on behalf of Celtic.  But the jury found that the agent did not have authority to make representations on behalf of Celtic concerning the policy’s terms, benefits, provisions, or conditions which were outside the scope of the written documents.  This appeal followed.

According to the Texas Supreme Court, in the context of life, health, and accident insurance, the Insurance Code makes no distinction between recording agents and soliciting agents.  The Insurance Code defines agents generally in Section 4001.051, by listing various acts performed in the ordinary course of providing insurance and in Section 4001.053, providing that any person who performs these acts “shall be held to be the agent of the company for which the act is done, or the risk is taken, as far as it relates to all liabilities, duties, requirements and penalties set forth in this chapter.”

The court noted that the soliciting agent performed, on Celtic’s behalf, at least some of the acts listed in the Code and that, therefore, the soliciting agent was Celtic’s agent.  The Court also noted that an insurance company is generally liable for any misconduct by an agent that is within the actual or apparent scope of that agent’s authority.

At trial, Celtic did not contend that the agent’s representations were so absurd that no reasonable person could have believed the agent was not acting within the scope of his authority.  Nor did Celtic assert any other challenge to the jury’s finding that the agent had authority to explain the policy.  Accordingly, under common law rules of agency, the Court held that Celtic was liable for the representations made by the soliciting agent in explaining the policy.