Actual Authority: What it is, How it Works

What Is Actual Authority?

Actual authority refers to specific powers, expressly conferred by a principal (often an insurance company) to an agent to act on the principal's behalf. This power may be broad, general power or it may be limited special power.

Specific powers are also known as "express authority."

How Actual Authority Works

Actual authority arises where the principal's words or conduct rationally cause the agent to believe that they have been empowered to act. An agent receives actual authority either orally or in writing.

Written authority is preferable, as verbal authority is somewhat difficult to verify. In a corporation, written express authority includes bylaws and resolutions from directors' meetings which grant the authorized person permission to carry out a specific act on behalf of the corporation.

If an agent, operating under actual authority, enters into a contract with a third party, the contract will create contractual rights and liabilities between the principal and the third party.

By contrast, implied authority (often referred to as usual authority) is authority granted to an agent to do acts that are reasonably incidental to and necessary for the effective performance of their duties. The exact powers of implied authority depend on the situation and are sometimes determined by the usages and customs of a trade, business, or profession.

Actual Authority vs. Apparent or Ostensible Authority

An agent will have apparent or ostensible (not actual) authority if the principal has indicated to a third party that an agent has the authority to act on their behalf, despite the fact that the agent doesn't have the actual authority to do so. Apparent authority also applies to situations where the third party has developed a reliance on the agent, which has resulted in tangible business outcomes.

In the context of apparent authority, the agent's "authority" is in appearances only, but no actual authority has been bestowed by the principal. Nevertheless, if a third party enters into a contract with such an agent operating under apparent authority, that contract will still be legally binding on the principal.

Apparent or ostensible authority gives rise to agency by estoppel. The principal's representation to a third party that an agent has authority to act on their behalf when acted upon by that third party by entering into a contract with the agent operates as an estoppel, which stops the principal from denying the contract is binding. 

If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected against liabilities so long as they have acted reasonably.