RelayRides has been forced to put its business in New York State on hold. The popular car-sharing service was issued a cease and desist notice from the state Department of Financial Services Thursday and ordered to halt its “repeated false advertising and violations of insurance law.” RelayRides agreed to halt its business in New York State until further notice.

Said state Superintendent of Financial Services Benjamin M. Lawsky: “RelayRides sold New Yorkers a false bill of goods. Despite RelayRides’ assurances to the contrary, their New York customers could get left holding the bag financially for an accident because the company’s insurance is illegal and inadequate.”

For each business transaction, RelayRides maintains a $1 million liability insurance policy for injury or damage to third parties. The policy is issued by Hudson Insurance Co., a New York insurer. RelayRides also says it will directly reimburse vehicle owners for damage to the vehicle at its own discretion.

RelayRides tells vehicle owners that the Hudson liability policy will cover them, and that the owner’s own policy will not be involved if there is an accident while a person is renting the vehicle. But according to the DFS, an owner’s personal liability insurance policy provides coverage to any person who drives the vehicle with the owner’s permission. New York law does not permit an insurer to exclude coverage for a renter. As a result, an owner may be personally liable for any accident that occurs while the vehicle is being rented.

Furthermore, the DFS said RelayRides advises renters to display Hudson ID cards in the event of an accident. But New York law requires a vehicle operator involved in an accident to show the police officer and the other party his own insurance card.

RelayRides also represents to vehicle owners that their participation in the program will not result in their own insurers canceling or not renewing their personal liability insurance. However, renting a personal vehicle may violate the terms an owner’s personal liability policy, entitling their insurer to cancel or not renew the policy, the DFS said.

The DFS investigation of RelayRides continues.

In related news, the company earlier this week acquired Wheelz, a San Francisco startup that also connects users with nearby rental cars. Despite the bad news for its New York operation, the acquisition is a plus for the company, as it will increase its market share.

"Our vision isn't to stop at the car rental market," RelayRides CEO Andre Haddad said in a statement. "It's really to help disrupt the concept of car ownership by enabling people to rent cars whenever they need them and access them on a need basis rather than having to buy one."

While data for car sharing indicates a significant increase in popularity over the last year, Haddad hopes to have a RelayRides car within a 10-minute walk of more than 100 million Americans by the end of 2015.

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