What Does Agency by Ratification Mean?
Agency by ratification means to grant authority to someone retroactively when they were previously acting in an unauthorized way. This authority can be granted officially through written documentation or another means of ratification.
Ratification is defined as “to approve of something.” There are two different types of ratification: expressed and implied. With expressed ratification, the terms of authority are clearly laid out either verbally or in writing, such as a receipt. Implied ratification is when the authority is assumed, but not explicitly stated. For example, it is implied that when one sits down in a restaurant and orders food, they will pay for the food at the end of the meal.
An insurance agent acts on behalf of an insurance company and must only act on what they are authorized to do. This usually includes the sales and administration of insurance policies. When the insurance agent makes the sale, the insurance company that accepts the agent’s actions then becomes responsible for any consequences that result from the acts, including being liable for any contracts made by the agent.
Insuranceopedia Explains Agency by Ratification
Because insurance operates on contract law, in most cases if the contract was signed without authorization by one of the parties, then the contract is null. Almost always, an insurance company will not accept an agent’s actions, even retroactively, if they were unauthorized because insurance companies want to make sure they are not held liable unless they can accept the risk themselves.
That being said, here is an example of how agency by ratification could happen during an insurance sale:
An insurance broker is working on a Saturday, and gets a phone call from a client looking for auto insurance on his truck with engine modifications. The broker finds a great deal for the client and fills out the paperwork for the client. The broker knows that engine modifications must be approved by the insurance company’s underwriting team, but she has done sales like this in the past, so she is confident it will be approved. The client signs the application form and pays the premium. The broker sends the money to the insurance company’s accounting department and sends the application to the underwriter for approval. The broker provides the proof of insurance card for the vehicle stamped with Saturday’s date, and the client is on their way.
Technically, that insurance broker is not authorized to provide insurance until the application is approved by underwriting, especially if there are any nonstandard aspects to the risk (such as the engine modifications). However, come Monday, the insurance company accepts the premium payment in their accounting department, and on Tuesday underwriting approves the application, even with the engine modifications. With the acceptance of this payment, the agreement is retroactively ratified by the insurance company — they also accept the risks associated with the insurance contract. Because the insurance company accepted the relationship between the broker and the insurance company, it was agency by ratification.