The scope of an agent’s power to act on behalf of an insurance company often extends beyond explicitly granted rights. This undeclared power arises from actions or conduct that a principal, through their silence or inaction, leads a third party to reasonably believe the agent possesses. For instance, if a claims adjuster routinely settles minor claims without prior approval and the insurer is aware of this practice but does not stop it, the adjuster may be perceived as having the power to settle similar claims in the future. This perceived power can bind the insurer, even if the agent lacks formal permission for that specific transaction.
Recognizing this concept is vital in the realm of insurance because it impacts the enforceability of agreements and the handling of claims. It bridges the gap between explicit and implicit representations, ensuring fair dealing and trust in insurance transactions. Historically, its understanding evolved through case law, solidifying the principle that companies are accountable for the reasonable inferences drawn from their agents’ behavior. This accountability promotes responsible oversight and clarity in agency agreements, preventing potential disputes and protecting policyholders.
