Question

Methvin was an agent for North American Specialty Insurance Company (NAS), which was engaged in the business of underwriting performance or construction bonds. As part of the agency agreement, Methvin was to seek prior approval from NAS before writing any bonds. During the course of the agency relationship, Methvin issued numerous unauthorized performance bonds. After learning about the unauthorized bonds, NAS accepted and retained payment of the premiums on all the unauthorized bonds issued by Methvin. Thereafter, 12 of the unauthorized bonds resulted in defaults, causing significant losses when NAS was forced to pay claims on them. NAS now argues that Methvin, not it, is legally responsible to pay the claims on the defaulted bonds because Methvin acted without authority. Is NAS legally liable to the pay the claims on the defaulted bonds? Explain.

Answer 1

answer-

In agency relationship, agent is authorized to act on behalf of another (called the principal) to create legal relations with a third party.

I think NAS is legally liable because in this case, Methvin has apparent authority which means a situation where a reasonable third party would understand that an agent(Methvin) had authority to act means he can underwrite bonds on his own. This means a principal(NAS) is bound by the agent's actions, even if the agent had no actual authority, whether express or implied. (Article 2.2.5 (Agent acting without or exceeding its authority).

According to this provision a principal, whose conduct leads a third party reasonably to believe that the agent has authority to act on its behalf, is prevented from invoking against the third party the lack of authority of the agent and is therefore bound by the latter’s act

also, if we put respondeat superior in this case, the act of employee is also considered the act of employer.