Common Law

Common law refers to a body of law that has evolved “organically” through the centuries. Various legal cases have come before the courts and the courts have applied and reapplied previous legal precedents to new settings. In this way, common law differs from “statutory law” — that is, specific laws passed by legislative bodies to address particular situations.

English common law — growing out of the decisions of the English judicial system — became the basis for law in the English colonies and expanded as our country grew. The legal systems of forty-nine of the fifty states are based, in part, on English common law. (Louisiana, initially a French colony, bases its legal system on the Napoleonic Code — a statutory system of justice predicated on precepts of Roman law.)

Several important concepts, derived from common law, have an impact on insurers and their agents. Among these are:

• Law of Agency
• Fiduciary Responsibility
• Defenses against Liability

This legal concept applies when someone (the agent) acts on another’s (the principal’s) behalf. This concept applies to a wide range of everyday situations — especially in the business world. Insurance companies rely on an outside sales force to market their products, so the law of agency — and the salesperson’s contract with represented insurers — determines whether the individual is, in fact, an “agent” of the company.

The question sometimes arises: “To what extent is the principal bound by the agent’s actions?” Only authorized acts of the agent can bind the company. The law of agency recognizes three types of authority that may be given to agents:

Express authority is conferred by a contract. It is given to the agent through his or her contract with the insurer and any amendments made by the company to that contract. The contract explicitly announces the detailed grant of authority to the agent and outlines his or her duties. As a result of this specificity, few compliance problems arise out of express authority.

Unlike express authority, which is granted via a contract, implied authority comes from the powers that the company customarily gives its agents. For example, an insurer may give an agent the express authority to solicit applications for life insurance on its behalf; by doing so, it also gave the agent the implied authority to telephone prospects on its behalf to arrange sales appointments. Implied authority arises when it:

• Is intended to be given by the insurer
• Usually relates to the general customs of the business
• Is not contractually provided
• Is not specifically delineated

The most troublesome level of authority, from the insurer’s perspective, is apparent authority. This is authority that a third party, such as a prospective client, can reasonably assume to be given to the agent by the principal. Apparent authority:

• Is not provided by contract
• Is not intended by the insurer, but
• Appears to the client to be given to the agent based upon the agent’s believable statements

Even if the agent has none of the three types of authority, it is still possible for an insurer to be liable for the agent’s acts through ratification — the insurer’s confirmation or approval of an agent’s actions. Ratification can bind the principal (the insurer) to the agent’s actions if:

• The agent represented himself as an agent acting on behalf of the insurer
• The customer believed the agent’s representations
• The insurer subsequently validates the agent’s actions by ratifying them in some fashion
• The insurer ratifies the entire agent transaction

It should be clear that agent actions may create both personal liability and insurer liability. It is principally the mitigation of that insurer liability that has caused much of the current emphasis that insurance companies have placed on compliance.

Those who voluntarily agree to act in the capacity of a “caretaker” of another’s rights, assets and/or well-being are acting in a fiduciary capacity. A fiduciary has an obligation to carry out his or her responsibilities with the utmost degree of “good faith, honesty, integrity, loyalty and undivided service of the beneficiaries’ interest.”

The common law standard applied to fiduciaries is the “prudent man rule”. Fiduciaries are supposed to exercise the diligence and foresight that a “prudent” or careful person would under similar circumstances. Whether the standard is the old common law “prudent man rule” or a series of statutory obligations, the underlying premise is the same: The fiduciary must place the interest of others above his or her personal interests.

Insurance agents who solicit applications and collect premium monies on behalf of insurance companies clearly have a fiduciary responsibility to the company. Insurance agents owe their primary allegiance to the company that appointed them.

These conflicting duties — to the insurer that appointed them and to the customers who rely upon them — pose a real dilemma for insurance agents. The solution to this conflict is honest dealing with all parties and full disclosure, or at a minimum, disclosure of the conflicting duties.

While the Law of Agency and Fiduciary Responsibility impose obligations on the agent, there are several common law concepts that can act to mitigate the agent’s or insurer’s liability: waiver, estoppel, election, and course of conduct and custom.

The Course of Conduct and Custom Doctrine considers how parties to a transaction have conducted themselves in the past. The premise being that if the parties handled their affairs in a particular manner for a long period of time, it is not unreasonable to conclude that such actions were acceptable to both parties.

For example, suppose a client purchases an annually renewable term life insurance policy. The agent never sent a notice of expiration, yet year after year the client would contact the agent to renew the coverage. After twenty years, the client did not contact the agent, the policy lapses, and the insured dies. Under the doctrine of “Course of Conduct and Custom,” the court could decide that the agent does not have a duty to inform, since it was not customary for the agent to send a notice of expiration and the client operated under those circumstances for twenty years.

In a waiver, an individual voluntarily and intentionally gives up a right the individual knows he or she has. Once waived, the individual cannot reassert that right. For example, a client signs an absolute assignment, transferring a life insurance policy to someone else. By doing so, the client is aware that she will give up control over the policy to the assignee. By assigning the policy, she has waived her rights under the policy and cannot claim at a later date that she continues to have them.

A related concept is that of estoppel. For example, a health insurance policy states that if the policy lapses and the policyholder wishes to reinstate the policy, all delinquent premiums must be sent directly to the home office. Assume that the policy lapses and the policyholder drops off the premiums at the agent’s office — who forwards them to the insurer, which then reinstates the policy. A couple of months later the insured is injured in an accident.

The concept of election works as follows: when a party to an insurance contract has a choice of actions and chooses one, he cannot subsequently change his choice if the change would be detrimental to the other party. If a client agrees to repairs of damaged property but later attempts to change the choice to a cash settlement after repairs are started, the court might say that the client had elected the repair option, and he would be held to that position. To do otherwise would injure the other party — the insurance company.