The California Department of Insurance has fined a San Francisco digital healthcare development company $7 million for selling health insurance without being properly licensed.

The company, Zenefits Inc., was fined by California insurance regulators for allowing unlicensed employees to sell insurance and for circumventing state insurance information education requirements. Zenefits is a three-year-old developer of digital applications for small businesses and human resource managers to manage payroll and other employee benefits using the internet and a health and life insurance brokerage firm.

The California Department of Insurance launched an investigation in 2015 after receiving complaints that Zenefits employees were selling health and life insurance without a license, the state says. Shortly after the investigation began, the company announced publicly that it had not been complying with insurance laws and regulations, which was followed by the resignation of Zenefits CEO Parker Conrad, says insurance commissioner Dave Jones.

The $7 million fine levied against Zenefits includes a $3 million penalty for licensing violations, including allowing unlicensed employees to sell insurance, a $4 million penalty for skirting the pre-licensing education and study-hour requirements for agent and broker licensing, and a $160,000 payment to reimburse the California Department of Insurance for investigation and examination expenses, the state says.

Zenefits is taking action to clean up its business practices, says the California Department of Insurance.

Zenefits has a new CEO, David Sacks, and is in the process of retraining of all licensed producers, and implementing an automated process to verify that only licensed individuals solicit and sell insurance products. “We are pleased to reach a settlement with the California Department of Insurance, which recognized our remediation efforts by suspending half the fine,” says a Zenefits spokeswoman.

Because the company is taking those steps, the state has suspended half of the $7 million fine, Jones says. The suspended portion of the fine could be reinstated if Zenefits fails to comply with ongoing licensing and regulatory mandates based on an examination of the companys business practices to be conducted in 2018, Jones says.

In California, we value internet-based start-ups, but we also insist that consumer protections laws are followed, Jones says. Zenefits is an example of an internet-based start-up whose former leaders created a culture where important consumer protection laws were brokena bad strategy that placed the company at risk.