4.5 Authority and Duties of an Agent

The Agent's Duties to the Principal

An agent acts on the principal's behalf and in the principal's interests. The law therefore imposes a bundle of duties on the agent, the most important of which is the fiduciary duty — a duty of loyalty that goes beyond ordinary commercial care.

Fiduciary Duty

The agent must act in good faith in the principal's interests and must not make any secret profit from the agency. The agent must also avoid any undisclosed conflict of interest. If a conflict exists, the agent must disclose it fully to the principal and obtain consent; failure to do so allows the principal to rescind the transaction or recover any profit made.

Other Key Duties

• Duty of care and skill. The agent must exercise the standard of care and skill reasonably to be expected of an agent in that role. A professional insurance broker is held to the standard of a reasonably competent broker.
• Duty to follow instructions. The agent must act within the scope of the principal's instructions and the authority granted. Departures require the principal's consent.
• Duty to account. The agent must keep proper records of money and property handled for the principal and must account for them on request. Premiums collected by an insurer's agent are held for the insurer and must be properly recorded and remitted.
• Duty to communicate. The agent must pass on to the principal information material to the agency — for example, facts affecting the risk that an insurer's agent learns during the sale.

The Principal's Duties to the Agent

The relationship is reciprocal. The principal owes the agent two main duties.

• Duty to pay remuneration. The principal must pay the agreed commission or other remuneration once the agent has performed the agreed services. If no amount was agreed, the principal must pay a reasonable sum.
• Duty to indemnify. The principal must indemnify the agent against liabilities and expenses properly incurred in the course of acting within authority. If the agent, acting within authority, incurs a liability to a third party, the principal must reimburse the agent.

Duties at a Glance

This table is a reliable exam aid. Questions often present a scenario and ask which duty has been breached; identifying the category first helps you pinpoint the answer.

Acting Outside Authority

If an agent acts outside authority, two consequences follow:

1. The principal is not bound — unless the principal ratifies the act. Ratification must be communicated, must cover the whole act, and must be made with knowledge of the material facts.
2. The agent may be personally liable to the third party for breach of warranty of authority. When an agent holds out that they have authority and a third party acts on that representation, the agent implicitly warrants that the authority exists. If it does not, and the third party suffers loss, the agent is liable in damages.

Insurance Example: Binding Authority Exceeded

Suppose an insurer grants a broker a binding authority to place motor risks up to a sum insured of £50,000, and the broker binds a risk at £75,000 without referring it to the insurer. If the insurer does not ratify:

• The insurer is not bound by the £75,000 contract.
• The broker may be personally liable to the insured for breach of warranty of authority.
• The broker may also be in breach of duty to the insurer (exceeding instructions) and may lose the right to indemnity from the insurer for any liability arising.

This is a classic IF1 scenario because it tests the interaction between agency law, insurance practice, and the broker's professional duties.

Imputation of Knowledge

A central consequence of agency in insurance is the imputation of an agent's knowledge to the principal. The general rule is that the principal is deemed to know what the agent knows in the course of the agency, because the agent is the principal's representative.

Effect for Insurer's Agents

Where the intermediary is the agent of the insurer (a tied agent, appointed representative, or the insurer's own staff), facts known by that agent about the risk are generally imputed to the insurer. The insurer cannot later argue that it was unaware of a material fact that its agent knew when the contract was concluded.

Effect for the Insured's Broker

Where the intermediary is an insurance broker acting for the insured, the broker's knowledge is generally treated as the insured's knowledge. If the broker knows of a material fact and fails to communicate it to the insurer, the insured — not the insurer — typically bears the consequences, with a possible remedy against the broker in professional negligence.

The Insurance Act 2015 and Knowledge

The Insurance Act 2015 modernised the duty of fair presentation of risk and refined the rules on knowledge. Under the Act:

• An insurer is treated as knowing what is known to the individuals who are responsible for the insurer's underwriting of the relevant risk.
• An insurer is also treated as knowing what would reasonably be expected to be known by those individuals.
• The insured's knowledge includes what is known to the individuals responsible for the insured's insurance and to the insured's agent (normally the broker).

The Act therefore preserves the broker-as-agent-of-the-insured principle while clarifying which individuals' knowledge counts for each party. IF1 questions on the 2015 Act often test the practical effect: a fact known to the broker but not communicated to the insurer is treated as known to the insured, and the insurer's remedies for a fair-presentation failure (which may include damages rather than avoidance) depend on what the insurer knew or ought to have known.

Practical Summary

• Identify whose agent the intermediary is before anything else.
• List the agent's duties to the principal and check which one a scenario implicates.
• Confirm whether the agent acted within authority; if not, check for ratification and consider personal liability for breach of warranty of authority.
• Apply the imputation of knowledge rule, modified as necessary by the Insurance Act 2015.

Working through these steps in order will resolve most agency questions in IF1.