Zenefits Slammed With $7M Fine From California Insurance Regulator

Zenefits Slammed With $7M Fine From California Insurance Regulator

The company, which sells corporate health insurance and provides businesses with human resources software, said on Monday that it had agreed to pay $7.2 million to settle accusations by California regulators that it had skirted licensing requirements. The company has slashed head count and agreed to reduce its valuation to $2 billion in exchange for shareholders agreeing not to sue the company. Zenefits generates revenue by collecting a commission when it sells insurance to its customers and by charging for extra features.

Update (11/28/16 4:34pm) "We are pleased to reach a settlement with the California Department of Insurance, which recognized our remediation efforts by suspending half the fine", a Zenefits spokesperson told TechCrunch.

It's one of the largest penalties for licensing violations ever assessed in the department's history, Jones said.

The California investigation centered around a piece of software that enabled Zenefits staff to complete prelicensing coursework in less than the amount of time required by the state, which tightly regulates insurance sales.

"Businesses and consumers should have confidence that anyone selling insurance to them in California is doing so in compliance with our consumer protection laws", Insurance Commissioner Dave Jones said in a release.

Regulators opened an investigation in 2015, after receiving complaints that Zenefits employees were transacting insurance sales without a license. Before today's announcement, Zenefits had paid out about $300,000 in settlements in six states, Zenefits CEO David Sacks said at TechCrunch Disrupt SF 2016.

"In California, we value internet-based start-ups, but we also insist that consumer protections laws are followed", Jones says.

Besides the licensing violations among its sales and account-management staff, Zenefits badly missed its internal financial projections previous year, resulting in hundreds of layoffs. But California, Zenefits' home state, was considered the most important resolution, and other states are expected to follow its lead.

Zenefits will not have to pay the full $7 million to California up front.

"Our enforcement action has resulted in Zenefits paying substantial monetary penalties for their licensing violations and ensures Zenefits complies with all of California's insurance laws and regulations", Commissioner Jones said. He immediately put into place mandated education courses and ethics training for insurance brokers, and hired an auditing firm to root out licensing violations and reported those to all state departments of insurance.

Earlier this year, an internal investigation by Zenefits determined that its licensing procedures were out of compliance. The suspended portion of the fine could be reinstated if Zenefits fails to comply with ongoing licensing and regulatory mandates based on an examination of the company's business practices to be conducted in 2018, Jones says.