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Agent & Carrier Get Into Legal Dispute Over Binding Authority



Insurance carriers grant their agents certain amounts and types of authority. That authority normally permits an agent to bind certain coverages or classes of business. There is often a cap on the limits of insurance an agent may bind without getting the carrier’s prior approval. If an agent goes beyond his stated authority, at best he may harm his relationship with that carrier. At worst, he may face a lawsuit filed by the carrier, as did a New Jersey agent.

A Connecticut general construction contractor had a job to build a housing project, and it hired a subcontractor to do part of the work. The subcontractor was required to provide payment and performance bonds as a condition of the job. The GC asked its insurance agent to help the sub obtain the bonds, and the agent referred the sub to the New Jersey agent. This agency represented a Massachusetts-based carrier that had given it authority to issue bonds with single limits up to $2 million and aggregate limits up to $4 million.

The GC and sub decided to “unbundle” the subcontract into three separate contracts. The bond agent allegedly said that he could provide three separate bonds that would act exactly as one single bond would for an unbundled contract. The agency eventually issued the bonds on the carrier’s behalf. Later, the agent allegedly told the GC that the subcontractor’s cash flow was not a problem and the carrier would support the sub so the work could be completed.

However, a few months later the GC terminated the subcontracts and demanded the carrier perform under the performance bonds. The carrier refused. The GC sued the carrier and all of the agents involved, seeking damages of more than $6 million. The carrier then countersued the agent for negligence and breach of the agent’s fiduciary duty to the carrier.

First, the carrier claimed that the agent exceeded the authority granted to him in a formal letter signed by both parties in 2010. In addition, the construction contracts contained “liquidated damages clauses” in excess of $1,000 per day. A liquidated damages clause in a contract specifies in advance the amount one party to a contract must pay if it fails to perform its duties under the contract. This amount was more than the carrier cared to underwrite. Lastly, the carrier alleged that the agent never told it about the sub’s cash flow and performance problems.

The agent asked the court to rule in the agent’s favor based on the facts as presented, arguing that for purposes of the carrier’s claims, he was not an agent of the carrier.

However, the court rejected that argument and denied the agent’s motion. It noted that the carrier had filed documents with the state insurance department, appointing the agency as its agent. Also, the carrier had given the agency power of attorney to issue bonds. Finally, it had issued a letter that appeared to appoint the individual agent in addition to the agency.

The agent made a number of arguments regarding whether he had actually accepted the agency appointment, whether the agency agreement applied to him or just the agency, and whether the carrier’s arguments were contradicted by its response to the general contractor’s lawsuit. The court found these to be “unconvincing” and concluded that there was “a genuine issue of material fact” as to whether the agent was acting as the carrier’s agent when the bonds were issued.

Interestingly, the agent did not argue against the allegation that he violated his authority. Instead, he argued that he was not bound by the letter of authority in this instance. This implies that he knew he had exceeded the written authority, and that is never a good idea. Violating authority harms an agency’s relationships with its underwriters and carrier management. In this case, it also caused serious legal trouble.

The partnership between agent and carrier is one of good faith. The carrier provides the coverage, the agent obtains the customers. Once one party or the other does something to cast doubt on whether that party can be trusted, the partnership starts to deteriorate. Agents must play within the boundaries set by their carriers, and ask their underwriters for approval when it is needed.

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