Agency Law Fundamentals
Agency law is the legal relationship between a principal (the party authorizing the agency) and an agent (the person selected by the principal to act on behalf of the principal). Agency law sets the standard for the conduct of the parties and the corresponding legal responsibilities that both parties owe to each other. A general principle of law is that an agent must act in the best interest of the principal. The principal also owes the agent a duty to compensate the agent for the agent’s services.
There are a number of different kinds of agencies. An agency may be an agent that is either an employer or an independent contractor. There are special government agencies for things such as environmental protection (EPA) and regulatory agencies that oversee corporate interests such as security and exchange commission (SEC) and the Food and Drug Administration (FDA). It is important to know that in certain relationships, there is no mutual agreement between the parties but the agent can still bind the principal. Such relationships include a statutory agency, a fiduciary agency (such as a guardian), and a customary agency (when a person has customarily been authorized to act on behalf of another person).
Relationship of agent and principal dictates responsibilities. The type of responsibilities expected of each party can be categorized as universally accepted responsibilities and responsibilities that vary by facts and circumstances of the agency . Generally, a principal is chargeable with the acts of an agent when the agent is acting within the authority of the principal. That is the key legal issue. The authority of the agent and the rights of the agent depend on the relationship established with the principal. A principal may create authority in an agent by the principal’s overt acts or through legally adopted implications. For instance, if a principal places a sign on the side of a building establishing agency with a sales representative and allowing the sales representative to enter into contracts of sales on the principal’s behalf, the principal is "charging" the agent to have authority to enter into contracts of sales for the principal.
Other types of authority under which an agent may be working is actual or implied authority. A principal may give an agent express instructions and a specific duty, but the agent’s authority may also be implied from the principal’s words or actions and/or the circumstances of the agency. Even though an agent may not be expressly delegated authority by the principal, an agent may be assumed to have such authority if the party dealing with the agent has a reasonable belief that the agent has the authority. In this circumstance, the principal may still be bound by the agent’s actions. In the end, the legal issues will be whether the principal limited the authority of the agent, but not whether the agent acted in the best interest of the principal.
Introduction to Agency Law Disclosure
A long-standing concept in real estate law is the related notion of "disclosure." Typically, real estate agents in California are required to disclose any facts he or she knows which materially affect the value or desirability of the property and which are not known to, or within diligent inspection of, the buyer. There are certain exceptions to this general rule of full disclosure; for example, California real estate agents are only required to use their "best efforts" to discover material facts affecting the value or desirability of a property.
Agency law disclosure is yet another type of disclosure the law deems critical for specific reasons. Like full disclosure of material facts affecting the value or desirability of a property, agency law disclosure benefits both the principal (the party with whom the agency is formed) and the agent in assisting the principal’s transaction. For the principal, agency law disclosure allows him/her to determine if the person(s) taking a position of legal representation and control are trustworthy and competent. For the agent, the concept of agency law disclosure allows the agent to be held accountable for his/her actions, should the actions be deemed deficient or in violation of the agency relationship.
As prescribed by C.A.R Form AD, there are three different agency law disclosures that reflect the following types of agency: the Seller Agency, the Buyer Agency, and the Dual Agency. Each form serves only the participant in that agency relationship, and should not be used by another party in the transaction. C.A.R Form AD should be attached to the relevant agency law disclosure form, once it has been completed (but not before). This completed agency law disclosure has no effect unless all parties to the transaction have provided the necessary signatures.
For example, where Buyer A’s agent and Seller B’s agent are working in a dual agency relationship, the agents (individually) must separately provide the necessary disclosures to Buyer A and Seller B in the Garden Grove form, respectively.
Elements of Agency Disclosure
Whether you are providing a complete Agency Law Disclosure to a party to a transaction or a declaration exempting you from doing so it is still important that the Declaration or Disclosure you use meets certain key elements. As with agency law, the Self-Paced online training course for CE credits contains a downloadable PDF of Approved agency law Declarations and Disclosures. First, the general purpose of a disclosure is to make sure a consumer is aware of the type of agency they may be involved with as well as who their agent is. Because neither of those things are always apparent to a consumer, an agency law disclosure of some sort, in accordance with the purpose, must have the following key elements: 1) The definition of agency and it’s purpose in the transaction. In most State’s it is usually unlawful for a licensee to act as an agent for a party to an agreement unless that party authorizes the agency relationship in writing. But, and it’s a big but, not every State requires the declaration to be in writing, so adding the definition of agency and it’s purpose to the Disclosure keeps the document concise, informative and limiting the risk of non-compliance with the law. 2) The duties of the agent. In keeping with the purpose above and the definition of agency, all agency disclosures, whether you must use one or not should include information about the duties of an Agent to its principal. The amount of detail a Declaration or Disclosure goes into with respect to the duties can vary; generally speaking, however, the clearer the Declaration or disclosure the better the chances the document will pass muster with whomever receives it. 3) Acknowledgements of the consumer’s responsibilities. These are typically short. Acknowledgements by the buyer or seller that the disclosure was made is usually enough. Some disclosures go a bit further and outline the main points. 4) Limitations Though this is not always included in a declaration that was a one-size-fits-all form, one should be careful to note to whom the declaration applies and does not apply. For example, if you provided the Declaration to a Buyer but only later learned there was also a Seller who was interested in listing their property, make sure the Disclosure is clear about the fact it is made to the prospective buyer only, then discuss the issue with the Seller to determine if the Declaration should be made to him or her. I’ve discussed transactions below where the Declaration must be modified because of the involvement of a licensed party.
Agency Disclosure Legal Requirements
The legal requirements for agency disclosure vary between jurisdictions. Some are simple and straightforward, while others can be complex and have a number of options. Still others are bare-bones and provide little guidance for practitioners.
The Canadian Real Estate Association (CREA), National Association of Realtors (NAR) and National Association of Realtors Commercial (NAR/C) have all issued their own interpretation of agency law. While not all states and provinces recognize these interpretations, at least some have found them to be a useful aid to professionals in their jurisdictions.
Several U.S. states such as Georgia, Mississippi, Nebraska, New Jersey, and Pennsylvania impose criminal or civil penalties, including fines, on brokers or agents who fail to comply with the agency disclosure requirements, or who fail to advise the buyer/seller about agency relationships. In some situations, the violation can also be a ground for disciplinary action at the state Board of Real Estate Commission or association, loss of licence, professional discipline or suspension.
In those Canadian provinces that require agency disclosure, there are disciplinary penalties, such as suspension and loss of licence, that may apply to a member if the member or their brokerage fails to provide full disclosure to the client or the customer. In addition, the Real Estate Council of Ontario (RECO) has published a bulletin that says that all real estate and mortgage profession registrants should "advise the public about the types of agency structures available to them in the real estate and mortgage industries" and "comply with their legislated recordkeeping obligations". So it seems that having proof that a registrant records the agency consent in the manner set out in the agency agreement will be deemed to be sufficient evidence of compliance with the recordkeeping requirement for the purposes of an inspection or audit.
Types of Agency Relationships
Not only is it important to know when you have an agency relationship, but also what kind of agency relationship you have. The three basic types of agency relationships are: (1) general agency; (2) special or limited agency; and (3) universal agency.
A general agency is a broader sense relationship with more authority. The agent has power to perform any and all acts that the principal could do, except as limited by the express agreement between the parties. For example, a broker employed under a general agency status has the right to transact all kinds of business related to the purpose for which he or she was appointed, such as, a banker for a principal .
A special or limited agency, is a more specific type of relationship characterized by "limited" powers. An agent is authorized to perform only the duties named in a contract, such as in a listing contract with a broker or a management contract with a property manager.
Broad powers are given to a universal agent when the principal relinquishes all control over his activities. While a general agent does not possess all the powers that the principal possesses, an agent acting on behalf of a principal that has granted its agent universal power of attorney occupies the dual role of agent and principal with the principal having no control over its agent’s activities.
Examples of Agency Law Disclosure
One example of effective agency disclosure comes from the travel industry, where online travel agencies (OTAs) such as Expedia and Orbitz provide clear information about the relationship between the consumer and the provider. When booking online, the service will often reveal the company acting as the agent, including whether or not the agent itself is a travel provider and whether or not it will receive a commission for the sale.
On the other hand, a real estate agency may not be so diligent. Many agents do not disclose who has permission to access a client’s property and are not transparent about any potential liability. According to the Oklahoma Real Estate Commission, "Failure to disclose who has permission to enter the property is the number one complaint we receive. Just because the Real Estate Listing Agreement gives you access does not mean potential buyers, their agents or any other person has your permission to enter the property."
The implications for vendors can be wide-reaching. The National Association of Minority and Women Owned Law Firms (NAMWOLF) website notes that, "most states require full disclosure of the selling agent’s agency status and allow the buyer a right to rescind the contract if the agency arrangements are not disclosed." In the case of a breach, the agents could be liable to the vendor or potentially the party they were representing.
Impact of Insufficient Disclosure
Failure to accurately disclose agency relationships has very serious legal ramifications. For instance, the disclosure must accurately identify the relationship between all parties to the transaction. A broker that fails to make an adequate disclosure, or makes a mistaken disclosure, is subject to claims of breach of fiduciary duty, breach of implied covenant of good faith and fair dealing, fraud and negligence which could expose the broker to financial liability. These potential claims may not be readily apparent to most real estate brokers who are accustomed to dealing with monetary disputes rather than tort claims. It is important to remember that the required disclosure must reflect the relationship for the transaction in question. It would be misleading to characterize a transaction as involving only one agent when the agent has represented both the buyer and the seller at different times in a single transaction.
Key Disclosure Best Practices
Effective disclosure in agency dealings is critical to the insurance agent. The agent’s fiduciary duties are not just a statutory requirement but also a moral and ethical obligation that should be a primary concern with every insurance agent. Knowing the duties and responsibilities as well as the current laws is the first step to protect yourself against an E&O claim. By taking the time to determine the scope of your duties and obligations to your clients and your broker or agency, you can stay one step ahead of any potential problems.
The following best practices are designed to help you comply with your duties to disclose all pertinent information to your clients and have written proof of your disclosure. Doing so will not only ensure that your clients and broker or agency have a clear understanding of the agency relationship, but also reduce your risk of an E&O claim.
Disclosure As An Agent
Include a disclosure of your agency relationship with the applicable client on all of your applications. If the application is for a personal line, the best practice is to attach the disclosure certified by the client. If the application is for a commercial line, a certificate of the disclosure should be attached to your error and omissions policy. The best practice would be to attach your signed disclosure to the client’s copy of the application or award each client with a certificate of disclosure.
Including a disclosure of your agency relationship on every application is not only a best practice but also required by NRS 686A.640 and 686A.650. This required disclosure allows your clients and broker or agency to understand the scope of your duties without ambiguity or question. You must ensure that all requisite information needed for the client to consent to the insurance policy is disclosed . By including such disclosure on every application and obtaining the client’s signature, you provide yourself with a layer of protection against an E&O claim.
Disclosure to a Broker/Agency
You have a duty to act in the best interest of your broker or agency, which requires the full disclosure of important information relating to each insurance application. For instance, you must disclose information about any other insurance policies held by the client. Your disclosure must include information about both the amount of coverage and the property that is covered under each policy. Another example concerns disclosure about other interests you may have in the transaction at hand. Make the client aware of all of your obligations and disclosure requirements to your broker/agency. You are required to disclose to the broker or agency any other insurance policies held by the client for the same type of insurance policy. The period of time involved in the insured risk can dictate when disclosure is necessary. For example, a California court noted that "there is no stated period within which an insured must report the existence of a possible second insurance policy." It also stated, however, that "when the insured becomes aware of insufficiency [in the existing policy], he has an additional duty and must make reasonable inquiry in order to ascertain whether there is a second policy (presumably one that covers the same type of risk)." Thus, you must disclose all policies for the same type of coverage, currently or in recent operation, whether they are held by you or the insured. By taking these simple steps to properly protect yourself when selling insurance coverage, you can increase your success and reduce your risk of facing an E&O claim.