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

Which term describes the obligation of compensating for damages incurred by an agent on behalf of a principal?

1. Ratification

2. Reimbursement

3. Indemnification

4. Liability

The correct answer is: Reimbursement

The correct answer is indemnification. This term refers specifically to the obligation that a principal has to compensate an agent for damages or losses incurred while acting on the principal's behalf. In the context of agency law, indemnification ensures that the agent is protected from financial loss when executing duties for the principal. This principle operates under the understanding that the agent is acting within the scope of their authority and that any resulting liabilities should not fall on the agent if they are acting in good faith and within the agreed parameters of their role. Therefore, when an agent incurs costs or faces legal claims while performing their duties, the principal is responsible for covering those expenses. The other terms, while related to agency and financial responsibilities, do not accurately capture this specific obligation: ratification involves the principal's approval of an act that was performed by the agent without authority; reimbursement refers to the repayment of specific expenses incurred by the agent for which the principal is responsible, but does not encompass the broader concept of indemnifying for damages; and liability pertains more to the legal responsibility for actions rather than the obligation to compensate.