Zenefits under investigation for using unlicensed brokers
Zenefits, a cloud-based health insurance start-up valued at $4.5bn, which helps US companies deal with providing cover and benefits for their employees is under investigation for allowing unlicensed brokers to sell insurance policies on its platform, a Buzzfeed investigation has found. The company is being investigated by Washington State, a move discovered by Zenefits in April, but only now made public. Zenefits has been a venture capital darling for some time, attracting investment from Andreessen Horowitz, Fidelity and TPG, however it will face increased scrutiny following this revelation, which suggests former employees apparently routinely brokered coverage without licences. It is unclear whether other states will follow Washington's lead in investigating the company.

The Silicon Valley startup Zenefits, valued at $4.5 billion in a funding round earlier this year, apparently flouted insurance laws by allowing unlicensed brokers to sell health insurance — an approach that has led to at least one regulatory inquiry into the legality of its operations.

Zenefits, a middleman in the health insurance business, has repeatedly failed to enforce legal requirements that anyone selling a health insurance policy have an appropriate state license, a BuzzFeed News investigation has found. The San Francisco–based company allowed numerous salespeople to act as insurance brokers in at least seven states without licenses to do so, according to internal emails and records, as well as interviews with eight former employees with direct knowledge of the matter.



BuzzFeed News has reviewed examples of the unlicensed sale of insurance by Zenefits employees dating back as far as the summer of 2014 and continuing through this summer. It is unclear when the practice began and whether it continues today; the company says it now has strict procedures in place to enforce licensing rules.

At least one regulator, the insurance commissioner in Washington state, is currently examining whether Zenefits operated there without licenses, according to a spokesperson for the agency, Stephanie Marquis. The Washington inquiry began in early 2015 and has not yet been resolved, she said.

Zenefits management seemed aware of the potentially serious consequences of violating licensing rules. Under Washington law, anyone who knowingly sells, solicits, or negotiates insurance without the proper state license is guilty of a Class B felony, which can carry a prison sentence of up to 10 years, as well as a civil penalty of up to $25,000 for each violation.

“You are putting the company at risk” by not “immediately” getting broker licenses in Washington, Niji Sabharwal, a Zenefits senior sales operations manager, told sales reps in April.

Upon learning of the Washington inquiry, Zenefits scrambled to get its house in order. Sales reps who had closed deals in that state were told of the inquiry by a Zenefits senior sales operations analyst, Erin Stephens, in an email in early April. The subject line read “URGENT -- Get Licensed in Washington.”

The email, and two follow-up notes, were sent on a Thursday. On the following Monday, 22 Zenefits employees became licensed brokers in Washington, state records show. Four others received their Washington licenses later that month.

Only this July, more than two years after Zenefits launched, did the company introduce a standardized “license management system” to track whether sales reps had licenses, an internal email shows. (Earlier efforts at license tracking were not comprehensive, according to two former employees.) That email, sent by Sabharwal to managers who oversaw sales reps, acknowledged that there were still “a few reps” who hadn’t yet received licenses “but are currently working deals.”

While Zenefits sales reps were told that they needed licenses to do their job, managers in many cases showed a blasé attitude toward the requirement, pushing the unlicensed reps to meet sales quotas, the former employees said. In several cases, sales reps who had failed a broker license exam once or more were allowed to continue working the phones. At least one person who lacked any license in any state but hit his sales quotas last fall was promoted, according to state records and former employees.

“It is — and has always been — Zenefits’ policy that every individual who sells insurance at Zenefits, as well as the company itself, must be licensed to sell insurance,” Zenefits said in a written statement provided to BuzzFeed News by a spokesperson, Kenneth Baer. “Zenefits has more than 280 active resident insurance licenses and more than 2,500 active non-resident licenses, and these licensed brokers have sold thousands of insurance policies over the past two-and-a-half years.”

“We have taken corrective action, including terminating the employee, when we have learned of violations, either because individuals failed to pass the brokerage exam or have otherwise violated our licensing policies,” the statement continued. “Any accusations of other individuals violating our licensure policies will be thoroughly investigated, and we will take appropriate remedial action.”

The company's full statement in response to questions from BuzzFeed News can be read here.

Zenefits gives away free software to small businesses to manage their employee benefits, though fundamentally it is an insurance brokerage firm, collecting recurring commissions when it sells health insurance policies to those businesses. It says its technology and user-friendliness can help it displace stodgy insurance brokers and claim their lucrative commissions.

The insurance brokerage industry is heavily regulated, and technological innovation has historically been slow to take hold. Many conventional brokers still rely on mountains of forms and spreadsheets — enhancing the appeal of Zenefits for customers who resent paperwork and value speed. On the other hand, conventional brokers argue that an important part of their job is to provide advice gained from study and experience, something that can’t easily be replicated by fresh-faced sales reps and sophisticated software.

Zenefits’ strategy for disrupting this industry — where human lives literally are at stake — has typified the current tech boom: rapid growth, with little regard for the conventions of old-school industries.

“If you’re an insurance broker, we’re going to drink your milkshake,” Parker Conrad, the Zenefits co-founder and CEO, said at a tech event in 2013.

Among new startups of recent years, few have generated as much praise from investors and reporters as Zenefits. Launched only in 2013, it quickly grew into a Silicon Valley “unicorn,” with a $4.5 billion valuation as of May. Forbes called it the “hottest startup” of 2014. Business Insider said it was a startup “to bet your career on in 2015.”

Hollywood celebrities Ashton Kutcher and Jared Leto are investors in the privately held company. A Silicon Valley celebrity, the former PayPal executive David Sacks, is its chief operating officer. Its other backers include the mutual fund giant Fidelity and the big private equity investor TPG, as well as prominent venture capital firm Andreessen Horowitz, which has invested more money in Zenefits than in any other startup in its portfolio. (Andreessen Horowitz is also an investor in BuzzFeed.)