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Difficulty: MediumAgent Authority and Agency Law

Producer David is appointed by Zenith Life Insurance. His written agency agreement specifically prohibits him from collecting cash for initial premiums. However, Zenith Life provides David with standard, company-branded premium receipt books that do not mention any payment method restrictions. An applicant gives David $200 in cash for an initial premium, and David issues an official Zenith Life receipt. Later, David loses the cash before submitting it to the insurer. If the applicant subsequently files a valid claim, which of the following accurately describes Zenith Life's legal position?

  1. A
    Zenith Life may deny the claim because the producer's written contract explicitly denied him the express authority to accept cash.
  2. B
    Zenith Life may deny the claim because the applicant's failure to verify the producer's cash-handling rules constitutes a waiver of their rights.
  3. Zenith Life is legally bound to honor the policy because supplying the producer with unrestricted, branded receipt books created apparent authority.Answer
  4. D
    Zenith Life is legally bound to honor the policy because every appointed producer possesses the implied authority to override internal company payment rules.

Answer

Zenith Life is legally bound to honor the policy because supplying the producer with unrestricted, branded receipt books created apparent authority.
The correct answer accurately applies the doctrine of apparent authority. Apparent authority is created by the actions or inactions of the principal (the insurer) rather than the agent. By equipping the producer with official company receipt forms that lacked any payment restrictions, the insurer created a situation where a reasonable consumer would believe the producer had the authority to accept cash. Therefore, the insurer is legally bound by the transaction.

Step-by-Step Solution

1
Identify the type of authority explicitly granted or denied in the scenario.
David was expressly prohibited from accepting cash (no express authority).
Establishing the baseline of what the producer was officially allowed to do by the principal.
2
Analyze the actions taken by the principal (the insurer) toward the public.
Zenith Life provided official, unrestricted company receipt books to David.
Agency law dictates that a principal's actions can create authority in the eyes of a third party, regardless of internal contracts.
3
Apply the appropriate agency law doctrine to the applicant's perspective.
The provision of the receipt books created apparent authority.
Because the principal acted in a way that would lead a reasonable person to believe David had authority, the principal is legally bound by David's acceptance of the cash.

Key Concept

Apparent Authority and Insurer Liability
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Topics

Agent Authority and Agency Law

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