Articles Posted in Life Insurance

What if a life insurance agent does something he is not supposed to do when he sells a life insurance policy?  What if the insurance company ratifies what the agent did?

An insurance company may be liable for unauthorized conduct of an agent or other person, if the insurance company ratifies the conduct.  Ratification may occur when the insurance company, though having no knowledge of the unauthorized act, retains the benefits of the transaction after acquiring full knowledge of it.  The critical factor is the insurance company’s knowledge of the transaction and it actions in light of that knowledge.  Ratification extends to the entire transaction.  This is discussed in the 1980, Texas Supreme Court opinion styled, Land Title Co. of Dallas, Inc. v. F. M. Stigler, Inc.

Here is an example.  In the 1989, Fourteenth District Court of Appeals opinion styled, Paramount National Life Insurance Co. v. Williams, the insurance company issued a hospitalization policy, without further investigation, despite having an application indicating the insured’s advanced age and poor health, and despite having knowledge of the agent’s inexperience.  By nevertheless accepting premiums, the insurance company ratified the agent’s misrepresentations made in the sale of the policy.

What is the difference between a “recording” agent and a “soliciting” agent?  Does it make a difference?

The law is this area can be confusing, despite the relatively straightforward principles. Historically, there was a distinction between “recording” agents and “soliciting” agents.  A recording agent had authority co-extensive with that of the company, so there was no question of the agent’s actual or apparent authority.  This was stated in the 1979, Texas Supreme Court opinion styled, Royal Globe Insurance Company v. Bar Consultants, Inc.  The court noted that the authority of a soliciting agent was much more limited that the actual authority of a recording agent.  The court went on to hold that the insurance company was liable for the agent’s misrepresentation of coverage.

This led some courts to conclude mistakenly that an insurance company could be liable for misrepresentations by a recording agent, but not by a soliciting agent.  This can be seen in the 1984, First District Court of Appeals opinion styled, Guthrie v. Republic National Insurance Co.  This analysis was wrong, which was made clear when the Texas Supreme Court decided the 1994 opinion styled, Celtic Life Insurance Company v. Coats.

What if the life insurance agent varied the life insurance contract terms?  What is your recourse?

There are Insurance Code statutes dealing with this.  An agent is not authorized by the statutes to alter or waive a term or condition of an insurance policy or an application for an insurance policy.  The statutes governing this are section 4001.051(c), and 4001.053.  Nevertheless, an insurance company will be liable “for purposes of the liabilities, duties, and penalties provided by” certain statutes pursuant to Texas Insurance Code, Section 4001.051(b).  The referenced statutes include the prohibitions found in Chapter 21 and now found in the new codification, sections 4001.051 and 4001.009.  The Texas Supreme Court explained the interaction between these provisions under the older statutes as follows in the 1979 opinion styled, Royal Globe Insurance Company v. Bar Consultants, Inc.:

We are not to be understood as holding that the statutory authority granted an agent under Article 21.02 authorizes that agent to misrepresent policy coverage and bind the company to terms contrary to those of the written policy; that question was decided by us in International Sec. Life In. Co. v. Finch, 496 S.W.2d 544 (Tex. 1973).  However, an insurance company that authorizes an agent to sell its policies may not escape liability for the misrepresentations made by that agent which violate article 21.21 or section 17.46 merely by establishing that the agent had no actual authority to make such misrepresentations.

An insurance company cannot always escape liability just by showing that it did not authorize the specific wrongful act.  This is discussed in the 1994, Texas Supreme Court opinion styled, Celtic Life Insurance Co. v. Coats.

The Celtic court said:

In determining a principal’s vicarious liability, the proper question is not whether the principal authorized the specific wrongful act; if that were the case, principals would seldom be liable for their agents’ misconduct.  Rather, the proper inquiry is whether the agent was acting within the scope of the agency relationship at the time of the act ….  The misrepresentation in the present case was made in the course of explaining the terms of the policy – a task the jury specifically found to be within the scope of the agent’s authority.  Thus, Celtic cannot escape liability on the basis that it did not authorize particular representations concerning the policy.

Court’s have described actual authority this way:

“Actual” authority, which includes both express and implied authority, usually denotes that authority a principal:  (1) intentionally confers upon an agent; (2) intentionally allows the agent to believe that he possesses; or (3) allows the agent to believe that he possesses by want of due care … “Implied” actual authority exists only as an adjunct to express actual authority … because implied authority is that which is proper, usual, and necessary to the exercise of the authority that the principal expressly delegates …

The preceding is discussed in 1994, First District Court of Appeals in an opinion styled, Spring Garden 79U, Inc. v. Stewart Title Co.; and in the 1991 Corpus Christi Court of Appeals opinion styled, Cameron County Sav. Ass’n v. Stewart Title Guaranty Co.; and in the 2000, Fourteenth Court of Appeals opinion styled, Saurez v. Jordan.

It may be obvious that a person was the insurer’s agent and was acting as agent — e.g., a person licensed to sell the company’s policy was engaged in selling the policy.  In addition, the statutes make clear that anyone engaging in the listed activities on behalf of an insurer will be treated as agent for that insurer.

As the Texas Supreme Court stated in the 1994, opinion styled, Celtic Life Insurance Company v. Coats. the court explained under the predecessor statute, agents are defined generally, and the statute lists various acts performed in the ordinary course of providing insurance — such as soliciting insurance; transmitting an application; receiving, collecting, or transmitting a premium; and adjusting a loss.  Anyone 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 relates to all liabilities, duties, requirements and penalties set form in the statute.

Another example is found in the 1979, Texas Supreme Court opinion styled, Royal Globe Insurance Company v. Bar Consultants, Inc.  There, an agent who issued a policy and signed it on behalf of the insurer was the insurer’s agent.  The insurer was vicariously liable for the agent’s misrepresentation that the policy covered property damage caused by vandalism.

Being able to hold the agent liable for any wrongs committed is important from a strategic standpoint in a lawsuit.

The first step to determine whether an insurer is vicariously liable is to determine whether the person who engaged in the conduct was acting as the insurer’s agent.

The question — “Who are agents?” was answered, until recently by one statute.  Formerly, article 21.02 broadly defined “agents” to include any person who performed certain actions on behalf of an insurance company.  As part of the ongoing codification of Texas statutes, the old article 21.02 is now found in Texas Insurance Code sections 4001.003 and 4001.051.

Insurance companies, like other entities, can only act through it’s agents.  Insurance companies rely on agents to sell their policies, to under write potential insureds, and to investigate and adjust claims.  Insurance companies may be vicariously liable for another’s misconduct if that other person is the insurer’s agent and if that agent acted within the scope of his or her authority.  This is discussed in several cases starting with the 1994 Texas Supreme Court opinion styled, Celtic Life Ins. Co. v. Coats, then the 1979 opinion styled, Royal Globe Ins. Co. v. Bar Consultants, Inc.  This is also discussed in the 1989 Houston 14th Court of Appeals opinion styled, Paramount Nat. Life Ins. Co. v. Williams.

The Texas Supreme Court explained in the Celtic case as follows:  An insurance company is generally liable for any misconduct by an agent that is within the actual or apparent scope of the agent’s authority.  This rule is based on notions of fairness: “since the principal has selected the agent to act in a venture in which the principal is interested, it is fair, as between him and a third person, to impose upon him the risk that the agent may exceed his instructions.”

The analysis for deciding if an agent is vicariously liable for the conduct of another has two steps: