California insurance regulators probing VC-backed Zenefits: Reuters

Venture capital-backed Software company Zenefits is being investigated by the California Department of Insurance over questions about its business practices, the agency said Thursday.

California Insurance Commissioner Dave Jones revealed in a statement that the agency had launched an investigation into Zenefits in 2015.

Jones said he had directed the agency to use additional resources to investigate whether Zenefits had complied with regulations that require the licensing and training of insurance agents and brokers.

The announcement of the investigation follows the resignation on Monday of Zenefits Chief Executive Parker Conrad, who was replaced amid allegations from state regulators that the startup failed to properly license its salespeople and adequately serve its customers.

Zenefits makes software for businesses to automate aspects of their human resources, including health insurance.

“The recent resignation of Zenefits’ CEO Parker Conrad is an important development, but it does not resolve our ongoing investigation of Zenefits’ business practices and their compliance with California law and regulations,” Jones said.

The department said it will not release information about its findings until the investigation is complete.

Zenefits did not immediately respond to Reuters’ request for comment on California’s investigation. Zenefits said in May 2015 it raised $500 million, giving it a $4.5 billion valuation, Reuters reported at the time.

Fidelity Management and Research Company and TPG Growth led the latest funding round. Other new investors were Founders Fund, Khosla Ventures, Insight Venture Partners, and Ashton Kutcher and Guy Oseary’s Sound Ventures, joining previous investors Andreessen Horowitz, Institutional Venture Partners, and actor Jared Leto.

Zenefits was the start-up Andreessen Horowitz invested the most cash in, a spokeswoman for the investment firm said in May. It’s not clear if that is still the case.

The investigation was first reported by media outlet BuzzFeed on Thursday. The news site had also previously reported, following BuzzFeed’s investigation of the company, that Zenefits allowed salespeople without licenses to act as insurance brokers in at least seven states.

San Francisco-based Zenefits is also under investigation by the Washington State Office of the Insurance Commissioner, a spokesman for the agency confirmed to Reuters in an email, for what was described as “unlicensed sales related to insurance policies.”

“The investigation could result in some kind of enforcement action, but that is still undetermined,” wrote Steve Valandra, the agency’s deputy commissioner for public affairs.Zenefits provides free software for businesses to manage stock options, maternity leave and vacation time, among other benefits. The company makes money acting as a high-tech health insurance broker, working as the middleman between businesses and healthcare providers such as Anthem Blue Cross, and earning the commission or broker fee.

Zenefits’ newly appointed CEO, David Sacks, who joined the company a year ago as chief operating officer, confirmed compliance issues in a letter to employees on Monday that was seen by Reuters.

“The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong,” Sacks said in the letter.

(Reporting by Heather Somerville; Editing by Diane Craft)

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