Recent settlements involving Zenefits and state insurance departments cast a spotlight on so-called anti-rebating laws to prevent benefit brokers from illegally luring in customers. They’re also expected to be closely watched by many other state regulators.

Zenefits ran afoul of these statutes in Washington where the company no longer is able to offer its HR software for free to small businesses as an inducement to sign up their employees for health benefits and generate commissions. The company has since agreed to charge a minimal fee for the software.

Anti-rebating laws, which initially targeted unfair discrimination when they were penned more than a century ago, are on the books in every state and the District of Columbia, except for California. Voters in the Golden State repealed their statute in 1988 as part of the Proposition 103 revolt against excessive insurance premiums. While Florida’s anti-rebating statute was struck down by an appeals court in 1984 for violating the state constitution’s due-process clause, the state legislature enacted a new anti-rebating law in 1990.

The settlement with Washington will likely embolden regulators in other states to also push back on Zenefits, says John Alan Doran, a partner at the law firm Sherman & Howard. “Only time will tell which states choose to do so,” he adds.

Wesley Bissett, senior counsel, government affairs at the Independent Insurance Agents & Brokers of America, agrees that a number of other state insurance departments will take notice of Washington’s action for several reasons. Chief among them: Commissioner Mike Kreidler is well respected, has served for years, is seen as a strong advocate for consumers and has support among other state insurance commissioners.

Washington settlement
With Washington regulators valuing the software at between $29,000 and $45,000 to an insured, at just $5 per employee per month Bissett says “most employers probably are still getting something for less than its fair market value.”

In Washington, where Zenefits previously paid a $100,000 fine for unlicensed insurance activity, the company will now charge $5 per employee per month for its core HR product. Zenefits recently expressed confidence that its customers will be willing to pay for the software.

However, in a letter to its Washington customers, the company’s general counsel, Josh Stein, criticized Kreidler for using “a consumer protection statute to raise prices for Washington consumers, a counterintuitive and wrong decision.”

He went on to say “this agreement provides a template for Zenefits to do business in states with a minority interpretation of the rebating statute,” though the company said no such discussions are being held with other states about charging for its software.

“Washington’s decision turns anti-rebating laws on their head, harming the very consumers they were designed to protect by eliminating the benefits of market competition and raising prices,” a Zenefits spokesman adds. He says it raises “potentially far-reaching consequences” that affect not only brokers, but others businesses that sell insurance along with other offerings.

Zenefits recently also agreed to a $62,000 penalty for unlicensed insurance activity in Missouri. The announcement followed months of investigation by the Department of Insurance, Financial Institutions and Professional Registration’s Consumer Affairs Division.

“The agreement is tough, but fair,” according to a Zenefits spokesman, who was heartened that Missouri regulators took into account Zenefits’ change in leadership, reconstituted board of directors and self-reported licensing violations. Other notable factors included hiring an outside big-four consulting firm to audit Zenefits’ processes and appointing a former federal prosecutor in the newly created position of chief compliance officer.

“We also have worked closely with regulators from coast to coast to settle previous violations, entering settlements with 20 states to date,” the spokesman reports, adding that Zenefits also has “a clean bill of health” from its lead regulator, California.

Utah and beyond
While Utah outlawed Zenefits’ software giveaways in 2014, the decision was reversed a year later when the governor signed legislation clarifying the state’s anti-rebating statute. That paved the way for what Zenefits describes as a welcoming of innovative new business models seen as delivering value to consumers.

Many other states have also created reasonable exemptions and properly used their anti-rebating laws to protect consumers from discriminatory pricing, the Zenefits spokesman says. “Rebating or inducement laws were never intended to thwart consumer benefits that come from integration and innovation,” he explains.

Illinois is another example of a state that several years ago issued a bulletin outlining acceptable practices with regard to rebating valuated services, consumer gifts, referral fees, etc., notes Gary Sanders, counsel and vice president of government relations with the National Association of Insurance and Financial Advisors. He says most state anti-rebating laws are similarly worded and exempt the gifting of small promotional items to clients.

“They’re designed to get at situations where a rebate being given would be the main reason why somebody buys a policy, which doesn’t do anybody any good,” Sanders explains. “This really boils down to how a state insurance department interprets their state’s anti-rebating laws, which although fairly detailed, have a lot of grey area.”

Looking ahead
The key takeaway for brokers and advisers is a need to check with their state insurance department if there’s any concern or uncertainty about some of the practices they’re engaged in being seen as a prohibited inducement, according to Sanders.

NAIFA has long opposed rebating because the focus is on cost considerations at the expense of product or service quality. “It could also lead to situations where there ends up being discrimination against consumers who might be looking to purchase lower face value policies in the life insurance area who don’t have the type of economic leverage that larger policy purchasers have,” Sanders explains.

Doran believes that producers need to recognize that “the Zenefits model is a force to be reckoned with, and Zenefits has shown through its Washington settlement an ability to modify its model as needed to respond to regulators.”

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