In agency relationships, if a third party sues the agent for activities performed on behalf of the principal, the principal must reimburse the agent for liability incurred if:

• A. The agent was at fault
• B. The agent was not at fault
• C. The principal was negligent
• D. The agent acted outside authority

Answer: (B)

Indemnification for acts performed for the principal. When an agent acts within the principal’s authority, the liability that arises from those acts falls on the principal, and the principal should reimburse the agent if the agent was not at fault. If a third party sues the agent for actions taken on behalf of the principal and the agent did nothing wrong, the agent’s defense costs and any liability paid are typically covered by the principal because the agent was simply carrying out the principal’s instructions. If the agent was at fault or acted outside authority, the reimbursement rule doesn’t apply in the same way—the agent would bear the liability (or the principal’s liability would hinge on different fault/authority considerations). So the agent not being at fault best explains why the principal must reimburse.