Legal Definitions - adverse-agent doctrine

The adverse-agent doctrine is a legal principle that applies when an agent, who is supposed to act on behalf of a principal, instead engages in fraudulent activities that harm the principal. Normally, any information an agent learns or actions an agent takes while working for a principal are legally considered known by or attributable to the principal. However, this doctrine creates an important exception: if an agent is involved in a scheme to defraud their principal, and they actively conceal this fraud, the agent's knowledge of their own fraudulent conduct will not be legally imputed to the principal. In essence, the principal is not held responsible for knowing about the agent's secret, self-serving, and harmful actions.

• Example 1: Corporate Embezzlement

  Imagine a Chief Financial Officer (CFO) of a large corporation, who is an agent of the company. The CFO secretly sets up shell companies and diverts millions of dollars of company funds into these accounts for personal enrichment, falsifying financial records to hide the embezzlement from the board of directors and shareholders. In this scenario, the adverse-agent doctrine would apply. Even though the CFO, as an agent, knew about the fraudulent diversion of funds, this knowledge would not be imputed to the corporation itself. The CFO was acting directly against the company's financial interests and actively concealing the fraud, meaning the company would not be deemed to have "known" about the embezzlement through its CFO.

• Example 2: Mortgage Loan Fraud

  Consider a mortgage broker working for a bank. The broker, eager to earn higher commissions, intentionally inflates a client's income and assets on a loan application, knowing the client doesn't actually qualify for the large loan. The broker then submits this fraudulent application to the bank, concealing their deceptive actions. Here, the adverse-agent doctrine would prevent the broker's knowledge of the application's falsity from being attributed to the bank. The broker was acting adversely to the bank's interest by exposing it to a high-risk loan and was actively hiding their fraudulent conduct, so the bank would not be considered to have "known" about the fraud through its agent.

• Example 3: Insurance Claims Collusion

  Suppose an insurance claims adjuster, an agent for an insurance company, colludes with a claimant to approve a fabricated insurance claim. The adjuster creates false reports and evidence to support the fraudulent claim in exchange for a kickback from the claimant, all while keeping their illicit arrangement secret from the insurance company. Under the adverse-agent doctrine, the insurance company would not be legally considered to have knowledge that the claim was fraudulent, even though its own adjuster was directly involved. The adjuster was acting against the company's financial interests and concealing their scheme, thus preventing their knowledge of the fraud from being imputed to the principal.