The online human resource and insurance benefits firm Zenefits agreed to a settlement with the California Department of Insurance that could cost the company $7 million in fines for allowing unlicensed employees to transact insurance and for skirting agent training requirements. Half the penalty is being imposed now, but the other half will only be imposed if Zenefits does not live up to its agreement with the Department.
Insurance Commissioner Dave Jones is taking the enforcement action against San Francisco-based Zenefits after the company blew the whistle on itself in November 2015. The then two-year-old tech start-up revealed that it was operating in violation of California law.
Internal reviews at Zenefits revealed that nearly 2,000 California insurance policies – roughly 25% of its total California book -- were sold by employees not properly licensed to transact insurance between Jan. 2014 and Nov. 2015.
The company’s business model is to contract with small businesses to provide human resources and payroll services benefits through a cloud-based system. The company would then encourage its clients to use Zenefits as its broker for employee benefits and other insurance needs. Zenefits is licensed to act as a life-only agent, accident and health agent, property broker-agent, and casualty broker-agent under its license.
The company’s internal review also revealed that it was violating state rules for training would-be insurance agents. The company’s founder and former CEO developed and distributed a “macro” that allowed employees to fulfill the training requirement without actually complying with the law.
“The macro…improperly enabled its employees to keep the online pre-licensing education course timer advancing whether or not the employee was, in fact, actively studying the course material,” the Department says in its order to show cause. “Licensed insurance production agencies incur significant costs associated with obtaining proper licensure for their employees. Respondent’s conduct in distributing the software macro to its employees allowed it to avoid or delay incurring costs, fees, and other expenses associated with satisfying pre-licensing education requirements and to expand in the marketplace more quickly.”
The macro was given to at least 99 employees at Zenefits.
The penalty includes $3 million for licensing violations, including allowing unlicensed employees to transact insurance and $4 million for subverting the training requirements. The agreement also includes $160,000 to reimburse the Department for the cost of its investigation. The Department is suspending $3.5 million of the penalty but says it will be imposed if a 2018 examination shows that Zenefits has not lived up to the agreement.