Future Business Leaders of America (FBLA) Business Law Practice Exam

What term refers to the payment for losses suffered by an agent due to the principal's actions?

1. Indemnification

2. Liability

3. Reimbursement

4. Assumption of risk

The correct answer is: Indemnification

Indemnification is the term used to describe the obligation of a principal to compensate an agent for losses incurred while acting on the principal's behalf. This principle recognizes that agents may face various risks or potential liabilities in their role, and it is the responsibility of the principal to ensure that agents are protected from such losses, particularly when those losses arise from the principal's actions or instructions. For example, if an agent is acting in good faith and following the directives of the principal but suffers financial losses or legal repercussions as a result of those directives, indemnification ensures that the agent can recover those costs. This concept is crucial in agency relationships as it fosters trust and encourages agents to perform their duties without fear of personal loss. Reimbursement, while related, specifically refers to the repayment for expenses incurred by the agent on behalf of the principal, rather than covering losses resulting from the principal’s actions. Liability generally pertains to the legal responsibility for damages or losses, which differs from the indemnification context. Assumption of risk involves acknowledging potential dangers associated with a particular action or role and does not involve compensation for losses.