Merritt Personal Lines Manual: Actual Authority vs. Apparent Authority

This raised a common issue in disputes about agents' promises. The argument dared the appeals court to decide whether Yannacito had actual or apparent authority. The appeals court decided the distinction was useless. It wrote:

Actual authority is considered that authority which is in fact given to an agent. In contrast, apparent authority is that authority which the agent appears to third parties to have. The acts or statements of an agent performed within the scope of his real or apparent authority are binding upon the principal, regardless of whether the principal has actual knowledge of the agent's act.

The court ruled that Yannacito had authority to negotiate for Life Investors. Responsibilities under his contract included soliciting applications, collecting premiums and delivering policies to applicants after they were issued by the company. "Certainly, Life Investors expected Yannacito to discuss the health and life insurance coverages offered by it with prospective policy purchasers," the court concluded.

Finally, Life Investors tried to argue that the Cozzas had the responsibility to read their policy--including the restrictions that limited coverage for Kim Cozza's childbirth and that held the company blameless for any misrepresentations an agent might make.

The appeals court rejected this argument out of hand. The Cozzas didn't have a copy of the policy when their twins were born, so they couldn't know it contradicted what Yannacito had told them.

Yannacito misrepresented to the Cozzas that they were eligible for a Life Investors' health insurance policy for their children and also misrepresented that a policy had been issued and that coverage existed. Furthermore, Yannacito had been given similar representations from Campbell, who had contacted the home office. The court wrote:

Indeed, the application that the Cozzas filled out indicates that coverage is provided if the application is accompanied by the first required premium. Thus... the agent's and application's representations are imputed to the insurer.

The court reiterated that Insurance Commissioner Smith had authority to take action against Life Investors and its agents. It cited Colorado insurance law, which stated:

Whenever the Commissioner has reason to believe that any person has been engaged or is engaging in this state in any unfair method of competition or any unfair or deceptive act or practice... and that a proceeding by him in respect thereto would be to the interest of the public, he shall proceed....

So, the court concluded:

We therefore agree with the Commissioner that if a selling agent of an insurance company misstates the eligibility terms of a policy while also indicating the scope and types of coverage involved in that policy, there has been a misrepresentation of the terms, benefits and conditions of the policy and, thus, a violation of [state law].

It upheld the lower court's ruling, which supported Commissioner Smith's actions and fines against Life Investors. Since the company's agents said it would cover Kim Cozza, it had to honor that promise.