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Paul Zimmerman

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Zenefits Settlement a Forceful Reminder of Importance of Licensing Compliance

On Monday, November 28, 2016, the California Department of Insurance (“CDI”) announced that its enforcement action against Zenefits, a human resources software company, had resulted in a $7 million penalty. This penalty is documented in a Stipulation and Waiver agreed to by Zenefits as part of the settlement. The enforcement action involved the transaction of insurance without a license and violations of the pre-licensing education requirements for California licensees.

Zenefits works with small businesses to manage items like payroll, insurance and other human resources services. According to the complaint, certain Zenefits employees were provided a software tool (known as a macro) that allowed them to circumvent requirements regarding hours of pre-licensing education completed by obtaining credit for time not actually spent in training programs. In addition, nearly 2,000 policies were sold by Zenefits employees who were not properly licensed. Half of the penalty ($3,500,000) is payable now. The other half may be waived in two years if an examination finds that Zenefits has complied with licensing protocols and pre-licensing education requirements during the examination period.

California Insurance Commissioner, Dave Jones, noted in a press release that “Zenefits is an example of an Internet based start-up whose former leaders created a culture where important consumer protection laws were broken—a bad strategy that placed the company at risk and that other start-ups should not follow given our strong consumer protection laws and the Department of Insurance's rigorous enforcement of those laws.” Prompted by the investigation, Zenefits has taken certain remedial actions to address its noncompliance. For example, it has internally reformed its practices, including retraining its personnel, implementing automated processes to ensure that only licensed individuals sell insurance, and replaced its CEO.

This action should serve as a reminder to all insurance agents and brokers doing business in California of the importance of compliance with California’s licensing laws. It also sends a strong message to tech companies seeking to do business in the insurance industry that regulators will enforce their state’s licensing and insurance laws and regulations. The CDI takes its consumer protection role seriously and views insurance agent and broker education and licensing as features of consumer protection. Agents and brokers should review the license status of employees and policies they have in place to ensure compliance with applicable licensing and education requirements by their personnel.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.