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Question

Difficulty: MediumAgent Authority and Agency Law

Producer Olivia is appointed by Meridian Property & Casualty to sell personal auto insurance. Her written agency contract expressly forbids her from soliciting or binding commercial property policies. However, Meridian recently launched a regional marketing campaign and mistakenly listed Olivia in a full-page newspaper advertisement as one of their 'Premier Commercial Lines Specialists.' Thomas, a local business owner, sees the advertisement, visits Olivia's office, and asks to insure his warehouse. Olivia issues a commercial property binder. Two days later, a fire destroys the warehouse. Meridian attempts to deny the claim, stating Olivia lacked the authority to bind commercial coverage.

Based on the principles of agency law, which of the following statements regarding this insurance transaction are correct? (Select all that apply)

  1. Olivia operated under apparent authority because the insurer's public advertisement created a reasonable belief for the business owner that she possessed the power to bind commercial risks.Answer
  2. Meridian Property & Casualty is legally obligated to honor the binder and pay the fire loss because the principal is bound by the acts of its agent when apparent authority exists.Answer
  3. C
    Olivia exercised implied authority to bind the commercial policy because being advertised as a specialist naturally grants the unwritten power to sell those specific policies.
  4. D
    Meridian Property & Casualty can successfully deny the claim and void the binder because the agent breached the express limitations written in her agency contract.

Answer

The correct statements are that Olivia operated under apparent authority due to the advertisement, and that Meridian Property & Casualty is legally obligated to honor the binder because of this apparent authority.
The correct statements accurately identify that the insurer's mistaken newspaper advertisement created apparent authority. Apparent authority is established when the principal's actions lead a reasonable third party to believe the agent has authority. Because apparent authority existed, the principal (Meridian) is legally bound by the agent's actions and must honor the binder, despite the agent's internal contract limitations.

Step-by-Step Solution

1
Analyze the agent's express authority based on the contract.
Olivia has express authority for personal auto, but is expressly prohibited from writing commercial property.
The written agency contract strictly defines the limits of express authority.
2
Evaluate the actions taken by the principal (the insurer).
The insurer published a newspaper advertisement listing Olivia as a commercial lines specialist.
Apparent authority is evaluated based on what the principal communicates to the public, intentionally or mistakenly.
3
Determine the resulting type of authority created by the insurer's actions.
The public advertisement created apparent authority.
A reasonable third party (Thomas) seeing the official company advertisement would naturally believe the agent has the authority to sell those policies.
4
Apply agency law principles to the claim outcome.
Meridian is legally bound to pay the claim to the innocent third party.
Under agency law, a principal is completely responsible for the acts of its agent when the agent acts within their apparent authority, regardless of private contract limitations.

Key Concept

Apparent Authority and Principal Liability
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Topics

Agent Authority and Agency Law

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