AD Banker Comprehensive Practice Exam

What describes the relationship whereby a person acts on behalf of a company and can bind the company?

1. Surplus lines or excess insurance

2. The law of large numbers

3. The law of agency

4. Brokerage business

The correct answer is: The law of agency

The relationship whereby a person acts on behalf of a company and has the authority to bind the company is known as the law of agency. This principle establishes that an agent, who is the person appointed to act on behalf of another (the principal), can create legal obligations for the principal through their actions. In an insurance context, for example, an insurance agent represents an insurance company and can issue policies, collect premiums, and perform other tasks that obligate the insurance company to the insured. In contrast, surplus lines or excess insurance pertains to insuring risks that are not covered by standard insurance policies, reflecting a different concept. The law of large numbers is a statistical principle that underpins insurance by demonstrating how increasing the number of exposure units reduces the relative variability of loss, thus not directly related to agency relationships. Brokerage business refers to the activities conducted by brokers who facilitate transactions between buyers and sellers but do not inherently define the agent-principal relationship that binds the actions of one to the obligations of another. The law of agency specifically encapsulates this authority and its consequences.