The Binder That Exceeded the Producer's Authority
Ridgeway Logistics operates seven trucks and has bought commercial auto coverage through broker Priya for six years. Priya's agency agreement with Northline Insurance allows her to issue binders for commercial auto fleets of five or fewer vehicles; fleets of six or more require home-office approval. On Friday, Ridgeway wins a contract and needs a new truck covered by Monday. Priya calls Northline's underwriter, who says, 'I can't approve a seven-truck fleet today; send the application and I'll review it next week.' Priya tells Ridgeway, 'You're covered effective Monday,' and issues a binder on Northline paper. On Monday, a Ridgeway truck rear-ends a car, causing $85,000 in damage. Northline denies coverage, saying Priya lacked authority. Ridgeway points out that Priya had issued two binders for its six-truck fleet in prior years and Northline had honored both. Nothing in those prior binders disclosed the fleet size to Northline.
1. Is Northline bound by Priya's binder? Analyze express, implied, and apparent authority.
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Northline's express authority is limited: the agency agreement permits binders only for fleets of five or fewer vehicles. Priya therefore lacked actual authority to bind a seven-truck fleet. But apparent authority can bind a principal when the principal's manifestations lead a third party reasonably to believe the agent has authority. Northline gave Priya binder forms, held her out as its producer, and honored two prior six-truck binders. That course of dealing makes Ridgeway's belief reasonable unless Ridgeway knew of the five-truck limit. The underwriter's refusal is not imputed to Ridgeway merely because Priya heard it; Priya is Ridgeway's broker for some purposes, but her knowledge may be imputed. Northline can also ratify by accepting premium or defending the claim. On these facts, Northline is likely bound, but the outcome turns on Ridgeway's knowledge and the scope of the prior dealings.
2. What difference would it make if the binder had been written on plain paper rather than Northline's binder form and Priya had signed only as 'Ridgeway's broker'?
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A binder does not have to be on company paper to be effective if the agent has authority, but the form matters as evidence of apparent authority. Plain paper signed only as Ridgeway's broker suggests Priya was acting for the insured, not Northline. Ridgeway's reliance on Northline coverage would be less reasonable. Northline would have a stronger argument that no coverage was created, and Priya could face liability for breach of warranty of authority or professional negligence. If Ridgeway can show a consistent course of dealing in which plain-paper binders were accepted, the result could flip.
3. What should Ridgeway do now to protect itself, and what facts would you investigate to decide whether Northline must pay?
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Ridgeway should immediately tender the claim and demand a defense under a reservation of rights, preserve the binder, the application, emails, and the two prior binders, and notify Priya's errors-and-omissions carrier. It should also ask Northline whether it received any premium or application and whether it has ratified the binder. Investigators should determine whether Ridgeway knew of the five-truck restriction, whether Northline ever objected to the prior six-truck binders, and whether Priya had any oral or implied authority. If Northline denies coverage, Ridgeway may need to sue for declaratory relief and pursue Priya. The key facts are knowledge, reliance, and the principal's manifestations.