Overview: An insurance agent acts as the legal representative of the insurance company. Understanding the three types of authority an agent can hold is essential both for exam purposes and for real-world practice, because an agent's actions within any of these authority types can legally bind the insurer to a contract.

In agency law, the insurer is the principal and the agent acts on its behalf. When an agent acts within their authority, the insurer is bound by that action just as if the insurer had acted directly.

Express authority is authority explicitly granted to the agent by the insurer, typically through the written agency agreement or appointment contract. It spells out exactly what the agent may do: which products they may sell, up to what dollar limits, what premium collection authority they have, and so on. If an agent acts within their express authority, the insurer is fully bound. An agent whose contract expressly authorizes writing homeowners policies up to $500,000 in coverage can bind the insurer to any such policy.

Implied authority is authority not explicitly written in the contract but reasonably necessary for the agent to carry out their express duties. It fills in the gaps that a contract cannot possibly enumerate in full. An agent expressly authorized to sell auto insurance has implied authority to collect initial premium payments, issue temporary binders, and use the company's standard application forms — even if none of these specific activities are mentioned in the contract. Implied authority is legally treated as actual authority; the insurer cannot disclaim liability by pointing to the absence of an explicit written authorization for a customary and necessary act.

Apparent authority is the most consequential type for the insurer because it is authority the insurer did not actually grant but that it inadvertently created in the eyes of a reasonable third party. Apparent authority arises from the insurer's own conduct: providing an agent with company letterhead, branded application forms, and the title "Authorized Representative" signals to the public that this agent speaks for the company. If that signal is inaccurate — perhaps the agent is terminated but still possesses company materials — and a customer reasonably relies on the appearance of authority to their detriment, the insurer is still legally bound to the customer.

The key principle: apparent authority is created by the insurer's representations to the world, not by the agent's self-promotion. If the insurer "clothed" the agent with the symbols of authority, the insurer must bear the consequences when that apparent authority is relied upon in good faith.

What happens to the agent in an apparent authority situation? The customer is protected and the insurer must honor the contract. But the insurer can then pursue the agent directly for the financial harm caused by the unauthorized action — including making a claim against the agent's Errors and Omissions (E&O) insurance.

FAQ

Can an agent create their own apparent authority by claiming to have powers they don't actually have?
No. Apparent authority must stem from the insurer's conduct, not the agent's own assertions. If an agent simply tells a customer "I can do anything the company can do" without any backing from the insurer, that is not apparent authority — it is misrepresentation by the agent, which may expose the agent personally to liability but does not bind the insurer.

What protects the agent when a customer sues claiming the agent made unauthorized promises?
Errors and Omissions (E&O) insurance, discussed in the final section of this chapter, covers exactly this scenario. If an agent acted outside their authority and a customer suffered a financial loss as a result, the agent's E&O policy will typically cover the defense costs and any damages.