Apparently Not: The Status of Apparent Authority after Holloway v. Shelter Mutual Insurance

• Author: Bendel Lee Carr Jr.
• Pages: 289-311

Page 289

The author wishes to thank Professor Wendell H. Holmes for his guidance in the development of this note, Stephen Paine for his editorial assistance, and Mr. John C. Davidson for his assistance in providing information regarding the Holloway case.

"The decisions of the courts on economic and social questions depend on their economic and social philosophy."¹

I Introduction

Apparent authority is an ambiguous doctrine which endured an unnecessary and unfriendly discussion in the recent third circuit case, Holloway v. Shelter Mutual Insurance.² The Louisiana

Legislature provided the third circuit with simple means of resolving the issues in Holloway, allowing an equitable and correct result without ever having to delve into the ambiguous apparent authority doctrine. But the third circuit did delve into apparent authority, and the ensuing discussion questioned even the doctrine's continued existence. Page 290

Apparent authority has long been recognized in Louisiana, and most of that recognition has been entirely jurisprudential. Prior to 1998 there were no code articles recognizing the doctrine, and some arguably disallowing it.³ This did not prevent courts from recognizing the doctrine of apparent authority when they felt it appropriate; they simply ignored the applicable articles.⁴

On January 1, 1998, a set of new code articles dealing with mandate took effect, codifying Louisiana's jurisprudential stance on several issues, including apparent authority.⁵ Subsequently, in December of 2003, the third circuit in Holloway stated that their reading of the revised code articles did not allow for the application of apparent authority.⁶ The case involved a waiver of uninsured motorist (UM) coverage. Shelter Mutual insured Donnie Holloway, who purchased a car and subsequently told his agent he wished to waive UM coverage. Donnie also informed his agent that his mother would go to the agent's office to execute the waiver and all other insurance documents. Donnie was thereafter killed in a car accident involving an uninsured driver, and after Shelter Insurance denied payment on the UM coverage Donnie's children sued to collect the UM benefits.⁷ Shelter Mutual filed a motion for summary judgment which could have been denied solely because Donnie's mother had no written authority to perform an act that required formalization by a writing. Instead the court, in reversing the summary judgment dismissal, took the liberty to discuss apparent authority as well.

When the third circuit, in Holloway, discussed apparent authority it looked to articles in Title XV of the Louisiana Civil Code so frequently ignored before the revision; seeing no precise statutory reproduction of the doctrine's jurisprudential standards, the court concluded it no longer existed.⁸ The court turned a blind eye to a new and important article which allows apparent authority, Page 291 Louisiana Civil Code article 3021.⁹ After all, a finding that apparent authority still exists and was applicable in Holloway could have produced the uncomfortable result of denying children insurance proceeds from their deceased father's insurer, and likely explains the court's selective application of the Civil Code articles on mandate.

Although in Holloway the third circuit refused to acknowledge the post-revision continuation of apparent authority, other circuits have continued to recognize the doctrine.¹⁰ This conflicting stance between the circuits has increased both the ambiguity surrounding the apparent authority doctrine and the need for clarification of its current status.

Section II of this note discusses the background of apparent authority leading up to the Holloway decision, examines jurisprudence before and after the codal revision, and analyzes the revision itself. Section III examines Holloway v. Shelter Mutual Insurance, looking at procedural and background issues, an in depth analysis of the court's written reasons for judgment, other theories not raised by the parties, and the correct means provided for deciding this case. The necessity of apparent authority and what should be done to clarify the doctrine is laid out in Section IV, and Section V summarizes the current status of apparent authority. The sum of the Sections reveals that apparent authority remains a part of Louisiana law. It has been for years and is not as easily discarded as the Holloway case suggests.

II The Development of Apparent Authority in Louisiana

When an agent binds his principal to a third person via power given to the agent by the principal, such is a demonstration of actual authority.¹¹ Actual authority arises from communications between principal and agent and is the most common type of authority in agency situations.¹² But it is not the only way an agent can bind her principal. Apparent authority is another way for Page 292 an agency relationship to be established or continued.¹³ This occurs when the agent is acting in excess, or absence, of any express authority, and is based on manifestations between the principal and third persons who contract with the agent.¹⁴ This common law theory of apparent authority is based in contract and has developed over time into a well-established and significant doctrine within Louisiana law.¹⁵ It was codified in 1997 and has been recognized jurisprudentially thereafter.¹⁶

A Apparent Authority Before January 1, 1998

Prior to January 1, 1998, apparent authority was a prevalent, yet uncodified doctrine in Louisiana.¹⁷ This lack of legislation, however, did not diminish the importance of the doctrine in our jurisprudence. Indeed, Louisiana courts adopted this common law doctrine whenever they felt equity dictated its application despite code articles negating it.¹⁸

This application dates back to 1931 and the Louisiana Supreme Court case, Interstate Electric Co. v. Frank Adam Electric Co.¹⁹

In that case the court outlined the basic premises on which apparent authority is established. The court declared limitations or restrictions on agents' powers inapplicable to third parties unknowing of those limitations or restrictions.²⁰ Instead, mutual Page 293 rights and liabilities are "governed by the apparent scope of the agent's authority, which is that authority the principal holds the agent out as possessing or which he permits the agent to represent that he possesses and which the principal is estopped to deny."²¹

This case demonstrated that apparent authority is created by the manifestations of the principal to the third person, not between the agent and principal, or the agent and third person.²² Interstate Electric was an early recognition of apparent authority. It established the basic premises for application of the doctrine, and said its absence would allow principals to "commit a fraud upon innocent persons."²³ Interstate Electric continued to be the standard on apparent authority for more than fifty years.²⁴

Later, in Boulos v. Morrison, the Louisiana Supreme Court revisited apparent authority and interjected a requirement of reasonable reliance.²⁵ While reaffirming the first requirement for apparent authority, a principal's manifestation to an innocent third party, the court declared, "a third party seeking to benefit from the doctrine of apparent authority may not blindly rely upon the assertions of the agent. He has a duty to inquire into the nature and extent of the agent's power."²⁶ This statement may be a reflection of the case and the unreasonable reliance it involved.²⁷ While Page 294 more prominent, Boulos was not the first case to incorporate the requirement of reasonableness. Several appellate decisions preceding Boulos required reasonableness, and like Boulos, called apparent authority an estoppel doctrine.²⁸ This indicated either a merger, or some courts' confusion, of the two different doctrines.

In Tedesco the supreme court remedied this possible confusion with a thorough discussion of apparent authority that explained the difference between agency by estoppel and apparent authority.²⁹

The court pointed out that Louisiana decisions have often used estoppel language when discussing apparent authority, and such usage is incorrect.³⁰

The Tedesco court explained that apparent authority is a doctrine arising from the objective theory of contracts, and thus produces rights and obligations reciprocally between principals and third persons.³¹ In theory, a principal may enforce a contract formed via the agent's apparent authority as easily as the third person. Additionally, reasonable reliance contains both a subjective and objective element. But it does not require a change in position for a valid contract to be formed. This is how agency by estoppel differs from apparent authority. Agency by estoppel requires that the innocent third party suffer a change in position, which follows logically since estoppel arises from tort principles and is aimed at preventing loss.³² Hence, the difference between apparent authority and agency by estoppel is that the former creates a contract when the principal either expressly or implicitly manifests to the third person, or community of which the third person is a member, that the agent has certain authorizations, and the third person reasonably relies on the manifestation. The latter creates a delictual action for damages whenever the third person can show a change of position resulting from some fault of the principal.³³ Although agency by estoppel and apparent authority Page 295 seem to collide in most situations, apparent...