Standard Funding Corp. v. Lewitt Agency, Inc., 88 N.Y.2d 546 (1996)
An insurance company is not liable for the fraudulent acts of its agent when the agent enters into unauthorized premium financing agreements, as such agreements fall outside the scope of the agent’s actual or apparent authority, and the insurance company receives no benefit from the fraud.
Summary
Standard Funding Corp. sued Public Service Mutual Insurance Company to recover losses from fraudulent premium financing agreements entered into by Lewitt Agency, an agent of Public Service Mutual. Lewitt fraudulently secured financing from Standard Funding for fictitious insurance policies. The New York Court of Appeals held that Public Service Mutual was not liable for Lewitt’s actions because Lewitt lacked actual or apparent authority to enter into premium financing agreements on behalf of the insurer, and the insurer did not ratify the unauthorized agreements or receive any benefit from them.
Facts
Lewitt Agency, Inc. was an agent authorized to sell insurance policies for Public Service Mutual. Standard Funding Corp., a premium financing company, entered into financing agreements with Lewitt to finance insurance premiums for Public Service Mutual policies. Lewitt submitted fraudulent financing agreements to Standard Funding, representing that Public Service Mutual policies had been issued and that insureds had paid a portion of the premiums. Based on these agreements, Standard Funding issued checks to Lewitt. These agreements covered fictitious policies and false insureds; no policies were ever issued, and Public Service Mutual never received any premiums.
Procedural History
Standard Funding sued Lewitt and Public Service Mutual. After Lewitt filed for bankruptcy, the claim against Public Service Mutual proceeded to trial. The Supreme Court entered judgment for Standard Funding. The Appellate Division affirmed, holding Public Service Mutual liable under the doctrine of apparent authority. The New York Court of Appeals reversed.
Issue(s)
1. Whether Lewitt had actual authority to procure premium financing agreements on behalf of Public Service Mutual.
2. Whether Lewitt had apparent authority to procure premium financing agreements on behalf of Public Service Mutual.
3. Whether Public Service Mutual ratified Lewitt’s unauthorized actions.
Holding
1. No, because the agency agreement between Lewitt and Public Service Mutual only authorized Lewitt to issue insurance policies and collect premiums, not to negotiate or enter into premium financing agreements.
2. No, because Public Service Mutual made no representations that Lewitt had the authority to procure premium financing, and the terms of the financing agreements themselves indicated that Lewitt was acting on its own behalf.
3. No, because Public Service Mutual never accepted the terms of the financing agreements and received no benefit from the fraudulent transactions.
Court’s Reasoning
The Court of Appeals reasoned that Lewitt’s agency agreement with Public Service Mutual only authorized Lewitt to issue insurance policies and collect premiums. The Court rejected the argument that premium financing was an activity incidental to those express powers, citing First Trust & Deposit Co. v. Middlesex Mut. Fire Ins. Co., 284 NY 747. The court emphasized that Lewitt’s actions in entering into the premium financing agreements were outside the scope of activities authorized by the agency agreement.
Regarding apparent authority, the Court stated, “Essential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction” (Hallock v. State of New York, 64 NY2d 224, 231). The Court found that Public Service Mutual made no such representations regarding Lewitt’s authority to procure premium financing. The Court also noted that the terms of the premium financing agreements themselves contradicted the claim of apparent authority, as the agreements were signed by Lewitt as “Broker or Agent,” and the checks were payable solely to Lewitt.
Finally, the Court rejected the argument that Public Service Mutual ratified Lewitt’s actions by receiving notices of financing, because Public Service Mutual never accepted the terms of the agreements. The Court also noted that the rule of implied ratification does not apply because Public Service Mutual received no premiums or any other benefit from the fraudulent transactions.