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.)
The revelation about unlicensed brokers, which has never previously been made public, comes as the company is facing questions about its ability to live up to its lofty valuation. Fidelity, which bought Zenefits shares in the May investment round, marked down the value of its stake by 48% as of the end of September, according to data from the investment research company Morningstar. While Zenefits has said it hopes to hit $100 million in annual revenue by January, one indicator suggested the figure had reached only $45 million by August, according to a recent Wall Street Journal report. The Zenefits spokesperson declined to comment on that report.
Zenefits is among a class of richly valued startups that have taken an aggressive stance toward long-standing industry rules. Uber and Airbnb, for example, have shown that it can be a winning strategy to clash with state and city governments over rules that the startups claim are outmoded or unfair. Zenefits got a taste of this sort of battle late last year, when Utah insurance regulators sought to block the company from operating there over claims that its free software amounted to an improper inducement for customers. (Utah allowed Zenefits back in this year.)
The sale of insurance is governed at the state level. In every state, brokers who sell health insurance policies to companies based there are required to have a license from that state. Many brokers interpret the laws to mean that they need a license not only to sell insurance but also to discuss it with clients in any meaningful way.
In California, where many Zenefits customers are located, the law says people can't "solicit, negotiate, or effect contracts of insurance" without a license. An important exemption is for clerical and support work, like setting up appointments or gathering basic information from customers. Under California law, selling insurance without a valid license is a misdemeanor punishable by a fine of up to $50,000 or up to a year in prison.
Zenefits itself is a licensed brokerage company, and Conrad, the CEO, has a broker license in all 50 states. But the employees who do the selling are also legally required to be licensed brokers in the states where they work.
"Whether you’re selling through an app or through a brick-and-mortar store, you have to be licensed” in every state in which you sell insurance policies, said Adam Beck, a professor of health insurance at the American College of Financial Services in Bryn Mawr, Pennsylvania. "Working for someone who happens to be licensed is not sufficient."
The unlicensed sale of insurance is challenging for regulators to catch, largely because there is no public database of insurance policies sold. Regulators generally rely on tips, including from customers, who can check whether their broker is licensed using state databases like this one, this one, or this one.
“When we started Zenefits, we followed a practice common to many small independent brokerages of having each broker licensed in their home state and having the agency itself also registered in all 50 states so as to allow out-of-state sales,” Zenefits said in its statement. “As we grew and heard from regulators that they wanted each licensed broker individually to acquire a non-resident license, we set out to do just that.”
The Zenefits sales force is run by Sam Blond, the San Francisco–based vice president of sales. He joined the company in late 2013 after quickly rising through the sales organization at EchoSign, a software startup that was sold to Adobe in 2011. Many of the apparently unlicensed insurance sales occurred in Zenefits’ big satellite office in Scottsdale, Arizona, which opened in the fall of last year and quickly filled up with hundreds of employees. But there is evidence of unlicensed selling of insurance in Zenefits’ San Francisco headquarters as well.
One Zenefits sales rep who didn’t have a license in any state closed insurance deals with at least 27 companies, starting in February and continuing through June, an internal document shows. The sales rep, who was based in Scottsdale and left Zenefits this summer, convinced eight of the companies to enroll in new health insurance, according to the document. He convinced 19 companies to make Zenefits their broker of record, the document shows. The states where he closed deals included Arizona, California, Massachusetts, Michigan, Nevada, and New Jersey.
In San Francisco, a different sales rep, who started in June 2014, sold a health insurance policy to a New York–based startup called Goodsie during her first months on the job. Conrad had personally reached out several times to woo Goodsie, which provides e-commerce software to businesses, but he bowed out and let the rep take over, emails show. This sales rep, however, lacked a New York broker license until June of this year, state records show.
Among the 22 Zenefits employees who got insurance licenses in Washington on the Monday after being warned about the regulatory inquiry, nine were based in Scottsdale, state records and their LinkedIn profiles show. The other 13 were in San Francisco.
Three of the former Zenefits employees interviewed by BuzzFeed News, refusing to speak on the record for fear of professional or legal consequences, acknowledged that they routinely pitched or sold health insurance policies without adequate licensing. Three others said they supervised the sale of health insurance by unlicensed sales reps.
"I made like $15,000 in the time I was there, just on commissions. And I never got my license," said an insurance salesperson who left Zenefits this summer. She estimated she had more than 100 conversations with different customers about insurance. "I took my test three times in a row, and I failed. They still let me work."
Without her license, she had to improvise on calls with customers.
When faced with a tricky question, "I would just google it,” she said. She would tell the customer, "Hold on one second, let me email the expert, he's on the line, hold on one second, I'll get back to you.” But in reality, “I would pick one of the first three links and I would just go off of that."
A large number of the new hires in the Scottsdale office came from other technology companies, with experience in sales but little familiarity with health insurance. Zenefits offered to pick up the cost of studying for and taking the broker test, several former employees said. But new sales reps there soon discovered that getting licensed wasn’t seen as an urgent priority. More important was hitting sales quotas, which initially would increase each month.
Those who hit the quotas, even if they lacked broker licenses, were rewarded, the former employees said. One of the earliest hires for the Scottsdale office started as a health insurance sales rep in September 2014, according to his LinkedIn profile and interviews with two of his former colleagues. He was promoted in January to a sales manager job, which would not necessarily require a broker license, and he was promoted again last month.
This sales rep had no broker license until September of this year, when he got a license in California, according to a search of every state insurance database for his name. After BuzzFeed News first attempted to contact him for this article, he got licenses in states including Arizona, Connecticut, Illinois, Louisiana, Nevada, Oregon, and Virginia, state records show.
Once an insurance broker gets a license in one state, they can pay a fee and fill out information online to have the credential replicated in other states where they do business. But even this simple task eluded many sales reps. One former sales rep who started in the Scottsdale office last fall said he had an Arizona license but didn’t bother to get licenses in the other states where he was selling insurance until January, when Blond instructed sales reps to focus on particular states.
Even after that instruction, sales reps had a relaxed attitude toward the licensing requirements, former employees said. Another former sales rep said he procrastinated after passing his broker exam, waiting two months before filling out the paperwork to get his first license this spring. In the meantime, he sold insurance.
Washington state regulators delivered a jolt to Zenefits, however. On April 2, just after 2 p.m., Stephens, the senior sales operations analyst, sent an email to sales reps who had "closed business in Washington in 2014 or 2015 without providing your licensing information to the sales operations team (thus, Zenefits at large.)"
She said Zenefits faced "an inquiry" from Washington's insurance regulator into the company's business practices. "As part of the response," she said, "we must list out every broker who deals with Washington clients and their WA license number. This requires that we gather all licensing information from individual reps" — this part was underlined and in red lettering — "TODAY by 4:00 PM."
"If you are not licensed in Washington, take 5 minutes to complete the process on NIPR," Stephens added, referring to the website that lets people apply to transfer their credentials to other states. She told sales reps to add their confirmation numbers to a Google doc after completing online applications.
Not everyone who received the email appeared to grasp its urgency.
“Drop what you are doing and submit the application to get licensed in WA,” read a bolded sentence in a follow-up email, sent just after 6 p.m. by Sabharwal, the senior sales operations manager.
“This is the third communication on this. It takes less than 10 mins,” he continued. “You are putting the company at risk by not doing this immediately.”
Months later, in July, unlicensed insurance sales were apparently still a problem. In the July 6 email announcing the license management system, Sabharwal said Zenefits would “now be able to prevent a rep from closing a deal if they are not licensed to sell into that state.”
“This is an area of great concern as the consequences of breaking these rules can be detrimental to our ability to operate in that state,” he continued.
In its written statement, Zenefits said, “As we have grown, so have our compliance procedures.” Zenefits said job offer letters to sales reps now specify licensing requirements, and that the company’s internal software systems now include licensing checks as part of the sales process.
A week after Sabharwal’s email, licensing information for a number of sales reps still hadn’t been entered into the new system, according to another email from him. The email, which Sabharwal sent to sales managers on July 13, contained a chart showing “Incomplete Resident Licenses by Manager.” The 16 managers listed by name in the chart corresponded to a combined 33 incomplete records for sales reps.
“A valid license means that they have their license number and expiration date,” Sabharwal reminded the managers. “Just passing the insurance test does not constitute a license.”
The former sales rep who closed at least 27 deals without a broker license appeared to shift his strategy toward the middle of the year, emails to his customers show. In a February email to one small business CEO he was courting, he said, "I primarily am a broker and obtain the responsibility to work with our clients in that capacity."
Later, in interactions with a different company, he appeared to take a more conservative approach. The customer, Defib This, a small company in Santa Cruz, California, that runs emergency response training courses, had been "desperately searching for insurance," according to Aki Williams, the chief operating officer.
But Williams said he was a "little peeved" when the sales rep refused to have any meaningful discussions about insurance policies. "He sent us emails that had multiple options, but we really couldn't pin him down to say, 'This is what's going to work best for your company,'" Williams said.
Williams ended up buying an insurance policy through the sales rep that took effect in July. She said she had no idea that he lacked a broker license.
When Zenefits sought to fix this issue, it declined to pull unlicensed sales reps off the phones entirely, the July 6 email from Sabharwal shows. For new hires going forward, Sabharwal told sales managers, the company would start “requiring reps to have passed their license exams before starting boot camp, which will ensure that they have a license by the time they get on the phones.” But the policy for current sales reps was apparently different.
“There [are] still, however, a few reps who have passed the test, submitted the application, and are awaiting their license number but are currently working deals,” he continued. “We are going to make an exception for these reps and allow them to close deals as long as their manager is on the phone with them.”
Sabharwal emphasized this instruction in his follow-up email on July 13.
“A reminder that if any of your reps do not have a valid license in hand for their resident state (usually CA or AZ), YOU MUST be on every call where insurance is discussed,” he told sales managers.
Two former employees said they participated in such phone calls, in which an unlicensed rep would be supervised by a more senior employee with a broker license. Such a solution, however, falls into a legal gray area, according to William Gausewitz, a Sacramento-based partner at the law firm Michelman & Robinson who formerly was a deputy insurance commissioner at the California Department of Insurance.
"I don't think it complies technically with the licensing laws," Gausewitz said, commenting in general on the practice. "But if the unlicensed people are supervised by a licensed broker, the department is not going to be as suspicious that the agency is engaged in flagrant lawbreaking violations."