Regulatory agencies in California and Washington caution that Zenefits and current or former employees could face criminal charges related to the alleged sale of health insurance without proper brokers' licenses.
In Washington state, a decision on whether to pursue legal penalties could come in a matter of weeks, according to a spokeswoman for the Office of the Insurance Commissioner.
"The best I can say is, I believe it's soon," spokeswoman Stephanie Marquis told the Business Times on Tuesday. "Within a month."
Zenefits co-founder and former CEO Parker Conrad resigned a week ago from the San Francisco-based HR and insurance brokerage startup. Former top marketing executive Sam Blond was replaced later in the week.
Regulators in California said they too are investigating Zenefits for allegedly having employees without proper credentials selling insurance. And newly named CEO David Sacks acknowledged that some compliance processes and controls "have been inadequate, and some decisions have just been plain wrong."
Late in the week, Sacks also disclosed that "many of our California sales representatives" had access to a software tool that may have helped them circumvent California law, by bypassing required pre-licensing training material online.
A spokesman for Zenefits told me Wednesday morning that the company had "no comment" on the possibility of criminal charges from pending state insurance department investigations.
Selling insurance without a proper license can be considered a felony offense in Washington, Marquis said, and "a company (such as a brokerage) could also be held liable for selling without a license," Marquis said. Penalties can include "fines, penalties and, in extreme cases, revoking a license to do business here," she said in an interview.
According to the Washington insurance department's website, Seattle's AGCS Marine Insurance Co. was fined $300,000 last November for allowing agents to issue 6,000 policies without being appointed with the company. And a number of individual agents or brokers had their licenses revoked in recent months for various infractions.
In California, which confirmed late last week that the California Department of Insurance also opened an investigation into Zenefits, spokeswoman Nancy Kincaid said the typical process is for the agency's internal enforcement staffers to investigate. If they find evidence that state laws involving broker licenses were violated, that evidence is provided to the county District Attorney in the county where the brokerage is based.
However, all violations of Insurance Code 1633 — selling insurance in California without a proper broker's license — are misdemeanors, Kincaid said. Violators can be fined up to $50,000 and face up to one year in a county jail, or both, according to the department's website.
Even if a company executive orders an employee to sell insurance without a license, Kincaid told me, "that's still a misdemeanor" under a California law. Asked why there's no distinction between a single individual selling insurance without a license and a senior executive at a large brokerage hypothetically ordering hundreds of employees to do so, she said that's "kind of a question for our legislature," which wrote the law.
The Insurance Department can also send a cease-and-desist order requiring a brokerage to stop any improper activity, she said, and if necessary "can suspend a license" to sell insurance in California. The latter would only occur after a hearing before an administrative law judge, Kincaid said.Kincaid said she has no timetable on how long the Department of Insurance's investigation into Zenefits will take.
Regulators in other states are reviewing whether the company's employees sold insurance in their states without proper credentials, a spokeswoman for the Pennsylvania Insurance Department, told me last Wednesday.
Michael Lujan, president of the California Association of Health Underwriters (and an executive at Limelight Health, which competes with Zenefits), described the size and scope of the allegations against Zenefits as "unprecedented."
"In 27 years as a licensed agent I've never seen anything on this scale before," Lujan said Tuesday.
Zenefits hasn't been charged with any crimes or other legal violations. But Sacks — formerly Yammer's founder and CEO, and an investor in Zenefits — acknowledged in memos to employees last week that the company didn't have adequate compliance processes in place and plans to develop a "comprehensive remediation and retraining program" for licensed employees who may have short-circuited their brokerage training.
"Moving forward," Sacks added, "any Zenefits employee who commits a licensing violation or does not promptly comply with our remediation steps will result in immediate disciplinary action, up to and including termination."
