What Does Agency by Estoppel Mean?
In legal terms, an “agent” is someone authorized to act on behalf of another. An agency relationship can be between individuals, individuals and corporations, or between corporations. An agent will have the power to act on behalf of another entity and will be able to make decisions that are binding to the other person as if they were making it themselves.
When an agency relationship is established, the agent has the legal duty to act in the best interest of the person they are representing. Using insurance as an example, your insurance agent as the legal duty to act in your best interest and help you with any questions and concerns.
Agency by estoppel is a legal term that refers to someone giving the impression to a layperson that they are an agent of another individual or company. This agency is not officially appointed and the agent by estoppel is not authorized to represent the person or company they purport themselves to be working for.
Insuranceopedia Explains Agency by Estoppel
Agency by estoppel is one where even though no formal agency agreement exists, the Principal (the one who appointed the agent to represent them) was complicit in giving the appearance of an agency relationship. Even though the agency by estoppel is not an officially authorized agreement to represent, it is still considered a legally binding agency relationship.
This means that an individual or company cannot unofficially give someone the appearance of working on their behalf but then distance themselves from the consequences of that ostensible agent's actions. In other words, if a company supplies someone with office stationery, branded business cards, and an office in their building – in other words, giving them the appearance of being an official representative of the company – then they are liable for that person's actions on behalf of the company, including any loans or insurance policies they have issued.
Put into simple terms, the principal is estopped (legally prevented) from denying that the third party was their agent if they were complicit in giving the public or laypersons the impression that they were a valid and officially authorized agent of the principal. This applies even in situations where the principal was careless and gave that impression accidentally.
In the world of insurance where everyone has to be licensed and affiliated with an insurance brokerage, issues arising out of agency by estoppel are fairly common. In this world, estoppel often occurs when the insurer or their agent ( your insurance advisor) leads the insured to have a mistaken belief that coverage existed where it actually does not.
In those cases, the insurer is still held liable for covering those technically uninsured losses. Because the agent implied such coverage was available at the time of sale, the insurer is estopped from denying the claim on that basis.