A young but surging California company offering both technology and health insurance policies says it's ready to go to the legislative and legal mattresses over an interpretation of Utah law that is threatening to make its operations here illegal.
Zenefits (like benefits) has stopped soliciting new clients in Utah while the company's business model of providing free software services to clients, while also offering to sell them insurance policies, is under attack by what co-founder and CEO Parker Conrad says are overzealous state regulators.
Utah Insurance Commissioner Todd Kiser issued the San Francisco company a letter last month that says the company could be ordered to cease operations and fined nearly $100,000 for violating Utah laws that prohibit insurance brokers from providing free or below-market products or services to clients or potential insurance clients.
Conrad said in an interview that his year-and-a-half-old company is the victim of an overly strict interpretation of Utah law and he has called on Gov. Gary Herbert to reverse the decision.
"We think what this is really about is protecting insurance brokers from competition," Conrad said.
Conrad has been on the attack nationally against the Utah Insurance Department's preliminary finding that his company's business model is not legal and that has gotten the attention of Herbert, who often points to Utah's reputation for a business-friendly environment.
Zenefits offers online software services that help small businesses manage their human resource administrative tasks such as payroll, taxes, retirement funds and benefits, including health insurance.
Zenefits allows the free use of its software platform to manage all of their human resource programs — even those of third-party benefit providers. Users may still have to pay fees to other service providers but not to Zenefits, with exceptions for some optional programs.
Most of Zenefits' income instead comes from commissions from third-party providers whose services are accessed through the company's platform. Zenefits also is a licensed insurance broker that receives commissions for selling policies to the companies that use its software, though those who have health insurance through other brokers can still use the software for free.
Utah law, however, prohibits insurance brokers from offering free or below-market services or products to potential or current clients "so that a person being solicited for insurance may enter into an insurance contract entirely upon the merits of the specific insurance contract," according to the letter Utah regulators sent to Zenefits.
Conrad has a different take: The law is aimed at shielding insurance brokers from competition, particularly from online operations like his.
"The insurance industry is still stuck around 1986," Conrad said, pointing to what he says it the continued use of paper and fax machines to communicate.
Conrad has appealed to Herbert to overturn the Insurance Department's findings — something the governor is not empowered to do — and said the company will follow through with administrative processes. But he said legislative or court action may be needed in the end.
"Utah is the only state that has decided to ban our service," Conrad said.
Herbert issued a statement in connection with the Zenifits dispute that said the state prided itself on its reputation as business-friendly and willingness to embrace innovation.
"While we have to uphold the law on the books, there are times our laws must adapt to changes in the marketplace," the governor said, pointing to the new general session of the Legislature set for January in saying that he is willing to work with all parties to "ensure Utah has the right policy."
Lt. Gov. Spencer Cox, who has met with Zenefits about the dispute, told reporters on a conference call on Friday that while the letter to Zenefits is a logical reading of Utah laws, Legislation might be needed to change out-of-date state statutes.
A bill file has already been opened by a lawmaker who anticipates possible changes, Cox said.
Commissioner Kiser said he could not comment directly on the department's Zenefits findings, but he did say that Utah's laws are "probably more restrictive on these issues than those of most states.
"Our state Legislature put into law a rebate inducement law that probably is the strictest in the nation," Kiser said. "So I think that's why they picked Utah as a battleground."
He said other companies have complained about the law, particularly about changes made in 2014 that they believe were an "over-reach."
"If we have over-reached here, then let's let the Legislature know and let's work on that," Kiser said.
David Leo of WMI Mutual Insurance Co. of Taylorsville said that while he wasn't aware of the Zenefits case, he had heard of similar complaints.
"There's nothing they're offering that going to lower the cost of medical claims or the overhead costs," he said.
tharvey@sltrib.com
Courtesy photo Parker Conrad, CEO and cofounder of Zenefits
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