stopNew York State’s Department of Financial Services today ordered car-sharing company RelayRides to suspend service in New York state, issuing a cease and desist letter to the company, alleging “repeated false advertising and violation of insurance law” and “putting the public at risk.” The agency also issued a consumer alert, warning New Yorkers that the insurance that RelayRides offers is “illegal and inadequate,” which could leave consumers personally financially liable for an accident.

RelayRides, which allows consumers to list their cars on an online marketplace to rent out to strangers instead of letting a car go unused, has said that consumers would not be responsible for out-of-pocket expenses if cars are stolen or are in accidents. The investigation is ongoing, and the state has demanded RelayRides provider, Hudson Insurance Company, turn over all information about its business dealings with RelayRides.

“RelayRides sold New Yorkers a false bill of goods,” said Benjamin M. Lawsky, Superintendent of Financial Services, in a statement. “Despite RelayRides’ assurances to the contrary, their New York customers could get left holding the bag financially for an accident.”

The relationship between car sharing companies like RelayRides and Getaround and traditional insurers has been contentious. Geico has already re-written its policies to specifically ban car-sharing, while others, like Allstate, have warned that such behavior could put current coverage in jeopardy.

RelayRides will insure consumers for up to $1 million in the event of an accident. But questions regarding the messiness of insurance liability became even more pronounced during a court case filed last February, when a Boston renter was killed while driving a RelayRides car, seriously injuring four others in a collision with an oncoming car.

The cease and desist announcement comes one day after RelayRides acquired competitor Wheelz for an undisclosed amount.

CEO Andre Haddad offered this comment in a company blog post:

Innovation, by its nature, does not always fit within existing structures. Although we’ve been careful to ensure the protections offered to our member community comply with legal frameworks around the country, we learned in conversations with the NY Department of Financial Services that it believes there is noncompliance with certain unique aspects of NY insurance law.

We are actively working with the Department to address these concerns. While we’re cooperating with the Department on these changes, we will be suspending activities that it considers non-compliant. All existing reservations in NY will be honored.

We reached out to the company via phone and email, but Haddad was unavailable for further comment.

[Image courtesy pndy]