A 1994, Texas Supreme Court case styled, Celtic Life Insurance Company v. Coats, shows us how the courts look to find the agency relationship between the acts of an agent and an insurance company.
This case presents issues relating to an insurance company’s liability for its agent’s representations: first, whether the company’s liability depends on its authorization of misrepresentations; second, whether reliance on the representations is an element of recovery.
Kenneth Harrell, a duly-appointed agent for Celtic visited Aloha Pools and met with its owner, John Coats, to discuss health insurance for Aloha’s employees and their families. Coats stated that he wanted a policy providing benefits for psychiatric care that would be equal to or better than the $20,000 coverage provided by his current policy. Coats explained that he needed such coverage because his oldest son had previously required psychiatric care, and he was concerned that his younger son might require similar care. Harrell responded that he understood Coats’ needs fully, having experienced similar financial difficulties in providing psychiatric care for his own son.
Harrell subsequently proposed that Coats purchase a specific policy written by Celtic–a policy that provided a maximum lifetime hospitalization benefit of $1 million. Harrell did not point out that psychiatric benefits under the policy were limited to $10,000.
Coats was assured the $10,000 limit only applied to out-patient psychiatric care and based on this representation purchased the policy.
Later, Coats’ son was admitted to Shoal Creek Hospital for psychiatric care. Coats filed a claim for his son’s treatment; but despite Harrell’s continued assurances that the in-hospital psychiatric treatment was covered by the $1 million hospitalization limit, Celtic paid only $10,000 of the $27,000 in medical expenses.
Coats filed this suit seeking relief under the Texas Insurance Code and the Texas Deceptive Trade Practices-Consumer Protection Act. After hearing the evidence, the jury made the following findings:
(1) Harrell made misrepresentations concerning the terms, benefits, provisions, or conditions of the insurance policy such as to be a producing cause of damages to Coats, but he did not do so knowingly;
(2) Harrell had authority to explain, on Celtic’s behalf, the benefits of the insurance policy; and (3) Harrell did not have the authority of Celtic to make representations concerning the insurance policy’s terms, benefits, provisions, or conditions which were outside the scope of the written document.
Celtic argues that it should not be held responsible for Harrell’s representations for two reasons: first, Harrell was a mere soliciting agent, and as such lacked authority to bind Celtic; and second, the jury’s answer to the third question–which was submitted over Coats’ objection–establishes that Harrell was acting outside of his authority as Celtic’s agent. This Court rejected both arguments.
In the contexts of life, health, and accident insurance, the Texas Insurance Code makes no distinction between recording agents and soliciting agents. Rather, agents are defined generally: and states that any person who performs these acts (then lists them) shall be held to be the agent of the company for which the act is done, or the risk is taken, as far as relates to all liabilities, duties, requirements and penalties set forth in this chapter.
There is no dispute that Harrell performed, on Celtic’s behalf, at least some of the acts listed. Thus, under that provision, Harrell was clearly Celtic’s agent.
An insurance company is generally liable for any misconduct by an agent that is within the actual or apparent scope of the agent’s authority. This rule is based on notions of fairness: “since the principal has selected the agent to act in a venture in which the principal is interested, it is fair, as between him and a third person, to impose upon him the risk that the agent may exceed his instructions.”
In the present case, the jury was asked whether Harrell had authority to explain, on Celtic’s behalf, the benefits of the insurance policy. The instructions accompanying this question explained that “authority” of an insurance agent can be actual or apparent; and in defining apparent authority, the instructions explained, among other things, that an insurance company may so clothe the agent with signs or indications of authority so as to lead a reasonably prudent person to believe that the agent actually has such authority.
Celtic does not contend that Harrell’s representations were so absurd that no reasonable person could have believed Harrell was acting within the scope of his authority. Nor does Celtic assert any other challenge to the jury’s finding that Coats had authority to explain the policy. Thus, under common-law rules of agency, Celtic is liable for the representations Harrell made in explaining the policy.
Celtic’s liability is not affected by the finding that Harrell lacked authority to make representations outside the scope of the written document. In determining a principal’s vicarious liability, the proper question is not whether the principal authorized the specific wrongful act; if that were the case, principals would seldom be liable for their agents’ misconduct. Rather, the proper inquiry is whether the agent was acting within the scope of the agency relationship at the time of committing the act. The misrepresentation in the present case was made in the course of explaining the terms of the policy–a task the jury specifically found to be within the scope of Harrell’s authority. Thus, Celtic cannot escape liability on the basis that it did not authorize particular representations concerning the policy.
Celtic asserts that Harrell is not entitled to recover under the DTPA because there has been no showing that Coats relied on Harrell’s representations.
The Court determined that the legislature had specifically rejected reliance as an element of recovery under the DTPA. The legislature chose, instead, to allow recovery when there is proof of a deceptive act or practice that is a “producing cause” of the consumer’s actual damages.
This Court upheld the judgment against Celtic
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