This column often discusses powers of attorney, commonly called POAs, and how they are used to allow a principal (such as a parent or other loved one) to delegate financial or healthcare decision-making to an agent, who is empowered to act for the principal.
There are two primary rules that apply to all POAs. First, an agent under a POA can only do what the POA explicitly allows the agent to do. For example, a principal may have a POA that empowers an agent to sign insurance contracts for the principal whenever the principal is out-of-state. The agent only can act for the principal during times when the principal is out-of-state and when the document to be signed is an insurance contract.
Second, an agent under a POA must always do what the principal wants as long as the agent is actually aware of the principal’s wishes. For instance, a principal may tell an agent to never sign an insurance contract for the principal with the University of Michigan. Even though the written POA itself says nothing of the prohibition on insurance contracts with the University of Michigan, the agent must honor the principal’s wishes because the agent is aware of the principal’s desired prohibition on insurance contracts with the University of Michigan.
In contrast, a principal may secretly desire that the agent never enter into a contract for the principal with the University of Michigan. Let us suppose that the principal never told the agent of that secret desire. And, let’s presume that the POA does not expressly prohibit contracts for the principal with the University of Michigan. In this instance, the agent is permitted to act on behalf of the principal to enter into a contract with the University of Michigan.
The most important ramification of an agent exceeding the authority in the written POA or disregarding the known wishes of the principal is that the agent can become personally liable for the legal responsibilities and obligations of the act improperly undertaken.
In the above example, if the agent lacked the legal ability to enter into an insurance contract with the University of Michigan, the principal may be able to later refuse to honor the contract that the agent entered into for the principal. However, in that instance, the University of Michigan may be able to force the agent himself or herself personally to satisfy certain obligations of that insurance contract, including paying financial obligations that the agent attempted to commit the principal to paying.
To avoid personal liability when acting under a POA, an agent must typically satisfy three general requirements. First, the agent must have the legal ability to act, as explained above. Second, the agent must not agree to be personally liable for the act/obligation or personally guarantee the principal’s action/obligation. Third, the agent must not be negligent in undertaking the act for the principal. This includes the responsibility of the agent to ensure that the act, as carried out by the agent for the principal, is not illegal.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.