Ley 174 del 2007

(Note 174)

(Approved November 12, 2007)

AN ACT

To amend Articles 34.010; 34.020; 34.030; 34.040; 34.050; 34.060; 34.070; 34.080; 34.090; 34.100; 34.110; 34.120; 34.130; 34.140; 34.150; 34.160; 34.170; 34.180; 34.191; 34.192; 34.193; 34.200; 34.210; 34.220; and 34.230; to add Articles 34.011; 34.121; and 34.240 to Chapter 34 of Act No. 77 of June 19, 1957, as amended, known as the "Insurance Code of Puerto Rico," in order to adjust its provisions to the current reality of insurance cooperatives and to promote their development.

STATEMENT OF MOTIVES

It is the public policy of the Commonwealth of Puerto Rico to promote and provide incentives for the development and strengthening of the Cooperative Movement, of which insurance cooperatives are a part. Compliance with this public policy has recently given way to substantial amendments to the laws that govern the different types of cooperatives in order to update them, with the exception of the law that governs insurance cooperatives, which dates from 1959. This legislation fulfills the purpose of updating and tempering to current times the legislation that regulates insurance cooperatives in order to ensure their strengthening and sustained development. This measure is necessary, since insurance cooperatives constitute a strong sector that offers services of great importance in the social and economic order to the people. Hence the vanguard and leadership position they hold both in the Cooperative Movement and in the Insurance Industry of Puerto Rico.

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The mission of insurance cooperatives is to serve as an important insurance center in Puerto Rico from which they may perform their main function of promoting and developing products and services that satisfy the insurance needs of the members, sponsors and policyholders, and to educate and disclose information on the need for insurance pursuant to and in harmony with the cooperativism philosophy. The operations of insurance cooperatives and their participation in the insurance market is no different from that of non-cooperative insurers. Insurance cooperatives are required to comply with all the requirements established for any other insurer and are supervised by the Office of the Insurance Commissioner of Puerto Rico as rigorously as all other insurers. The fundamental difference between them is the manner in which insurance cooperatives distribute their profits.

Insurance cooperatives withhold part of their profits to defray the operations of the business and the plans for expansion. Another part of the profits is distributed among its employees, owner-partners and policyholders. Another part is used for social benefit programs and the improvement of the quality of life of the less privileged sectors of our society. To carry out their educational function, insurance cooperatives annually separate one tenth $(1 / 10)$ of one percent of the total volume of premiums. From this reserve, they contribute to the League of Cooperatives, a third-level cooperative entity that groups all the domestic cooperative institutions and whose main function is to develop cooperative education intensely and permanently, as well as to promote the development of the Cooperative Movement.

In harmony with their cooperative nature, insurance cooperatives perform an important social function in favor of the communities and the Puerto Rican people in general. In order to do so, they have a social reserve that is nourished by their available net surplus. Their contribution in this area reaches different institutions that in turn make significant contributions to our people, such as hospitals, homes

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for children, women and the elderly, associations, universities and museums, successful housing projects for the elderly population and for those with limited resources in Quebradillas and Morovis, and social and sports activities for the elderly population, contests to promote the arts among students of all the schools, universities specialized in arts and the general public. They also support different orientation campaigns for the people on topics of high transcendence such as the use of the seat belt and the prevention of teenage pregnancies.

The economic system thus benefits from this cooperative form to do business when the benefits obtained by the insurance cooperatives are reinvested to contribute with their strengthening.

Cooperativism is a system whereby those who are a part thereof mutually support each other in order to strengthen the cooperative sector of the economy and maximize its economy-regulating function. Hence, the commitment shown by insurance cooperatives to said philosophy, through the economic investments they continually make which are directed to contributing to the financial support of important cooperative projects and thus to the strengthening of our economy.

The Commonwealth of Puerto Rico guarantees to insurance cooperatives the necessary free development and autonomy, as well as its collaboration and support for the achievement of their mission. It is also the policy of the Commonwealth of Puerto Rico that insurance cooperatives enjoy all the faculties and prerogatives granted by law to other juridical persons and that no discriminatory restrictions or additional demands be established because they are organized as cooperatives.

In consideration of the above, it is necessary to adjust the law that regulates domestic insurance cooperatives to the regulatory requirements of the cooperative system in order to ensure their adequate and efficient operations.

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BE IT ENACTED BY THE LEGISLATURE OF PUERTO RICO:

Section 1.- Article 34.010 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.010.- Scope, Objectives and Purposes, Special Provisions. This Chapter applies only to domestic insurance cooperatives.

The purpose of insurance cooperatives is to promote the general wellbeing of the community through the development of insurance contracts that satisfy the need for protection against risks of its members, sponsors and the general public, in harmony with the cooperativism philosophy. With this purpose, it shall educate and disclose information on the need for and benefits of insurance and shall allocate funds for the purposes of cooperative education."

Section 2.- A new Article 34.011 is hereby added to Act No. 77 of June 19, 1957, as amended, to read as follows: "Article 34.011.- General Definitions For the purposes of this Chapter, unless otherwise expressly provided, the following definitions shall prevail: (1) Cooperative Bank - Refers to the Cooperative Bank of Puerto Rico. (2) Cooperative Affiliate - Refers to a cooperative that has been admitted as a partner by the Board of Directors of the insurance cooperative. (3) Fund Contribution Certificate - Refers to the document that accredits the contribution or shares of a member in the capital of the insurance cooperative. (4) Second-Grade Cooperative - Refers to those cooperatives whose members are cooperative entities. (5) Proxy - Refers to the natural person designated by a member to represent him/her in the assemblies held by the insurance

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cooperative, provided that said member, whether an affiliate cooperative or the Cooperative Bank, has met the requirements established for such designation by the insurance cooperative in its bylaws. (6) Officer - Refers to persons who are in charge of the daily administration of the insurance cooperative, such as the president, vice-president, secretary, treasurer and any others necessary for such purpose. (7) Board Officers - Refers to the directors elected by the Board to hold positions, such as the president, vice-president, secretary, treasurer of the Board of Directors of the insurance cooperative and other positions for which it is provided in the bylaws of the insurance cooperative. (8) Board - Refers to the Board of Directors of the insurance cooperative. (9) Members - Refers to those natural persons or affiliate cooperatives to which the insurance cooperative has issued a fund or share contribution certificate. (10) Sponsorship - Refers to the proportion that exists between the volume of business carried out between a cooperative and its members and the total volume of the same business carried out between said cooperative and its members and policyholders during a certain period of time. (11) Term - Refers to the period of time during which the person elected as such by the assembly of members or designated as such by the Board of Directors of the insurance cooperative shall perform as

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director of the insurance cooperative, in accordance with the provisions of this Chapter. (12) Duration of the Term - The duration of the term shall be three years, except in those cases in which:

(a) the director is designated by the Board of Directors of the insurance cooperative, in which case the duration of the term shall not exceed one (1) year;

(b) or by the initial staggered system established in the bylaws;

(c) or in the cases in which the assembly of the members elects a person for one or two years to complete the term of a director that has ceased to fill his/her position."

Section 3.- Article 34.020 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.020.- General Requirements of Insurance Cooperatives- The general requirements that the insurance cooperatives shall meet are the following: (1) To operate in the interest of their members and policyholders. (2) To operate on the basis of the principle of equality of rights and obligations with respect to their members. (3) To have available a minimum surplus fund accumulated through member contributions at the time of organization. Said members shall receive a fund contribution certificate as evidence of their contribution. (4) To grant to each member one single vote which shall be exercised at member assemblies personally and not by proxy. In the case that the member is a cooperative affiliate, or is the Cooperative Bank, it shall exercise its vote through its proxy.

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(5) To further the social and economic improvement of their members and policyholders through their joint action in a collective work. (6) To pay or accredit interest on fund contribution certificates issued and outstanding, according to the insurance cooperative's surplus. The maximum interest to be paid shall be determined at least every two years, by the Insurance Commissioner, according to the prevailing rates in the private commercial banking institutions. (7) Not to refuse admission as member to any person by reason of race, color, social standing, religious belief, or political affiliation; that is, to admit every one who, being eligible in accordance with the nature and scope of the operations and activities of the insurance cooperative, applies for admission therein, in accordance with the provisions in this Chapter and in the bylaws of the insurance cooperative. These provisions, however, shall not be construed as a waiver of the right of the Board to refuse admission to any person or cooperative $t$ hat, in its judgment, may prejudice the interests or obstruct or otherwise hinder the accomplishment of the ends and purposes of the insurance cooperative. (8) Not to be for pecuniary profit, inasmuch as their returns and savings shall be distributed on the basis of sponsorship among the policyholders, after establishing such voluntary reserves as may be deemed necessary for the sound operation of the organization. It being understood by distribution on the basis of sponsorship, that which may result from applying an actuarial formula for the distribution of surpluses. Provided, that the directors of an insurance cooperative may from time to time pay or accredit to the

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policyholders entitled thereto, the sponsorship owing to them after accrediting the members with the corresponding interest. Provided, also, that such payments shall be made from such portions of the surplus funds that represent net savings made and net profits earned from their businesses, if the same do not reduce the surplus of the insurance cooperative to a sum lower than five percent of all its liabilities."

Section 4.- Article 34.030 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.030.- Powers of the Insurance Cooperative The insurance cooperative shall have the same general powers as set forth in this Code for other insurers."

Section 5.- Article 34.040 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.040.- Incorporation of an Insurance Cooperative: An insurance cooperative may organize under this Chapter to underwrite insurance with its members and other sponsors. (1) Eleven or more persons of legal age who are residents of Puerto Rico and who join in their capacity as consumers may incorporate an insurance cooperative. It being understood by consumers those persons who are to obtain the insurance services rendered by the cooperative. (2) The incorporators must sign and certify in triplicate before a notary public the articles of incorporation. (3) If the articles of incorporation comply with the provisions of this Code, the Commissioner shall endorse his/her approval thereon to that effect. One copy of said articles shall be filed in the Office of

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the Secretary of State, another in the Office of the Commissioner and the third copy shall be returned to the insurance cooperative. Once these copies are so filed the incorporation shall be deemed made. (4) The fees for such filing shall be as provided in Chapter 7 of this Code and no additional fee shall be charged therefor by the Secretary of State."

Section 6.- Article 34.050 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.050.- Articles of Incorporation, Contents. The articles of incorporation of an insurance cooperative shall state: (1) The name of the insurance cooperative, which shall contain as a distinctive part thereof, the word 'Cooperative.' Provided, that no insurance cooperative may select a name already adopted by another insurer or which is so similar thereto as to be likely to create confusion. (2) The name of the city or town in which will be located the insurance cooperative's main place of business, which place must be in Puerto Rico. (3) The duration of its existence, which may be perpetual. (4) The kinds of insurance the insurance cooperative is formed to transact, according to the definitions thereof in this Code. The insurance cooperative may initially be authorized to transact one or several kinds of insurance. (5) There shall be indicated the authorized total number of fund contribution certificates and the amount of the contribution represented by each certificate. If the insurance cooperative

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authorizes more than one kind of contribution certificates, it shall indicate the description of each kind; the number of certificates making up each kind; and the rights, preferences and restrictions granted to or imposed on each kind. (6) The names and mailing addresses of the incorporators and the number of fund contribution certificates underwritten. (7) The names and mailing addresses of the provisional directors, who shall not be less than five.

The articles of incorporation of an insurance cooperative may include any other provision that is not contrary to the law, morality or the public order."

Section 7.- Article 34.060 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.060.- Amendments to Articles of Incorporation: (1) The articles of incorporation of an insurance cooperative may be amended by resolution adopted by $2 / 3$ of the members present at a vote taken in a regular or a special assembly called for such purpose. (2) If the amendment is to change the insurance cooperative's name after the transaction of insurance in Puerto Rico thereunder, the proposed amendment shall not be submitted to the members but after the Board has applied for, and received the consent of the Commissioner to the proposed change. The amendment shall be deemed approved, unless it is denied by the Commissioner within thirty (30) days of it having been submitted to his/her consideration. (3) After adoption of the amendment by the members of the insurance cooperative, its president and secretary shall, under the corporate

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seal, certify the amendment in triplicate and file one copy with the Commissioner, one copy with the Secretary of State and retain the other copy in the insurance cooperative records. Upon completion of such filings the amendment shall be deemed effectuated."

Section 8.- Article 34.070 of Act No. 77 of June 19, 1957, as amended, is hereby amended; three new subsections

(g) ,

(h) ,

(i) , are hereby adopted; the present subsection

(g) is hereby eliminated; and present subsection

(h) is hereby renumbered, to read as follows: "Article 34.070.- Bylaws, Contents: (1) The members shall have the power, by a majority vote of the assembly legally constituted for that purpose, to approve and amend the bylaws to regulate the procedures of the insurance cooperative and govern the administration of its affairs. Such bylaws, if consistent with the law and the articles of incorporation, shall provide on:

(a) The number, qualifications, powers and duration of term of office and manner of election of directors in the assemblies of members.

(b) The notice, quorum and holding of regular and special assemblies of members and voting thereat. No assembly shall be lawfully constituted unless at least 20% of the total number of the members of the insurance cooperative is present. Provided further, that not more than thirteen (13) months shall elapse between assemblies.

(c) The notice, quorum and holding of regular and special meetings of the Board of Directors.

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(d) The manner of voting and the conditions under which the members shall vote at a regular or special assembly of the insurance cooperative.

(e) Issuance and transfer of fund contribution certificates of the insurance cooperative.

(f) The execution of contracts, and of the rights and interests of its members.

(g) All matters related to the election, removal, resignation or substitution of directors or officers of the Board. In case the bylaws grant to the Board of Directors the power to remove a director, it shall provide that the director shall be entitled to request a reconsideration of the determination of the Board within fifteen (15) workdays following the date on which the removal is notified to him/her. The removed director shall have the right to appeal the determination in reconsideration before the next regular assembly of members, provided he/she notifies to the Board his/her decision to appeal, duly grounded, within fifteen (15) workdays as of the notice of the determination in reconsideration.

(h) All matters related to the admission and denial of member applications and separation through a procedure that complies with due process of law.

(i) The obligation to create and adopt a code of ethics to govern the personal and professional behavior of the directors.

(j) All other usual, necessary and convenient matters. (2) The insurance cooperative shall promptly file with the Commissioner a copy of the Bylaws, certified by the Secretary of

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the insurance cooperative, as well as of every modification or addition to its bylaws. The Commissioner shall deny any clause of the bylaws that he/she deems to be illegal, unfair or injurious to the legitimate interests and due protection of the members or policyholders of the insurance cooperative. The bylaws, as well as its amendments, shall be deemed approved, unless denied by the Commissioner within thirty (30) days of having been submitted for his/her consideration."

Section 9.- Article 34.080 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.080.- Members, Admission, Resignation and Involuntary Separation, Contribution Certificates, Liability, Voting Right, Duties, Obligations and Liquidation of Obligations (1) Admission:

(a) The Board of an insurance cooperative shall have the power to admit members according to the admission rules established by the articles of incorporation or the bylaws, or by resolution of the board, which rules shall be in harmony with the ends and purposes of the insurance cooperative, its faculties, and the provisions of this Code that allow admission as a member only to natural persons, only to cooperatives, or both. Provided, that if an application for admission is denied by the Board, the candidate shall have the right to appeal said decision before the next assembly that may be held, within fifteen (15) workdays as of the notice of the decision of the Board. The candidate shall have the right to appeal the determination in reconsideration

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before the next regular assembly of members, as long as he/she notifies to the Board his/her decision to appeal, duly grounded, within fifteen (15) workdays, as of the notice thereof. In case the said assembly revokes by a majority vote, prior to the corresponding hearing, the decision of the Board, as long as said action is consistent with the Insurance Code, the Articles of Incorporation, or the bylaws of the insurance cooperative nor with the rules governing the eligibility of members established in the Bylaws, the applicant shall be considered as a member of the cooperative from the date of the resolution revoking said decision.

(b) The Cooperative Bank of Puerto Rico may become a member of the insurance cooperatives. (2) Resignation and Separation:

(a) Resignation - When a member wishes to terminate his/her relations with an insurance cooperative, he/she shall tender his/her resignation in writing to the Board, which shall act according to the provisions of this Code, the Articles of Incorporation and the bylaws or rules applicable to the case.

(b) Causes for the Separation of a Member

The Board of Directors of the insurance cooperative may separate or expel a member when it deems that he/she: (1) Does not comply with his/her duties and obligations as a member, as established in this Code or any other provided by the bylaws. (2) Has acted against the interests or ends and purposes of the insurance cooperative.

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(3) Has violated the provisions of this Chapter applicable to the members or has incurred any of the violations established in the Bylaws as cause for separation.

(c) Procedure for Involuntary Separation - When the Board considers that a member is acting against the interests of the insurance cooperative or of the obligations contracted with the cooperative, said Board may separate the member and deprive him/her of his/her rights and benefits in the insurance cooperative, counting from the date of his/her removal, after written notice of charges is served on the member affected, who shall be given a reasonable opportunity to defend himself at a hearing before the Board. The member so separated may, within the fifteen (15) workdays following the date on which notice of his/her separation was served on him/her, appeal from the decision of the Board.

The member shall have the right to appeal the decision in reconsideration before the next regular assembly of members, provided he/she notifies the Board of his/her decision to appeal, duly grounded, within fifteen (15) workdays, as of the date of the notice of the decision in reconsideration.

The assembly may, by a majority of the members present, after the proper hearing, provided it is acting in accordance with the Insurance Code, the articles of incorporation or the bylaws of the insurance cooperative, ratify the decision of the Board or order the reinstatement of

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the member, including restoration of his/her rights and privileges.

(d) In the case that the insurance cooperative has natural persons among its members, upon the death of a member, his/her heirs or successors in interest may select the person who will be entitled to be part of the insurance cooperative, if such person meets the requirements established by the cooperative association for the admission of new members, and the fund contribution certificates and other assets the deceased may have had in the cooperative shall be registered to the name of said person. In case of opting for the liquidation of assets, the interests of the member in the property of the insurance cooperative shall be delivered to the person or persons entitled thereto. (3) Fund Contribution Certificate:

(a) Every member shall be under obligation to pay the admission quota provided in the bylaws of the insurance cooperative, which shall never be less than a fund contribution certificate.

(b) The fund contribution certificates of an insurance cooperative may be transferred only with the consent of the Board and to persons eligible as members according to the articles of incorporation and the bylaws of the insurance cooperative. This restriction shall be printed on every fund contribution certificate. (4) Voting Right.- Every member shall have the right to cast only one vote in the regular and special assemblies of the insurance

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cooperative, notwithstanding the fund contribution certificates he/she owns. Provided, that this right is personal and unassignable, and may only be exercised at the assemblies of the insurance cooperative, in person if he/she is a natural person and by proxy if it is a cooperative or the Cooperative Bank. (5) Duties and Obligations of the Member

Every member shall comply with the obligations established by this Chapter, with the articles of incorporation and with the bylaws, and with:

(a) Any social or financial obligation toward the insurance cooperative.

(b) The agreements of the assembly and of the Board of Directors.

(c) Shall be liable for the debts and obligations of the insurance cooperative only up to the unpaid amount, if any, on the fund contribution certificates underwritten by him/her.

(d) Sponsoring and watching over the interests of the insurance cooperative, which includes, among other things, periodic contributions to its social capital to contribute toward its strengthening and solidity and place with the insurance cooperative not less than 50% of the total premiums paid for the same kinds or lines of insurance marketed by the insurance cooperative. (6) Liquidation of Obligations

When a member ceases to be so, the Board shall pay to the member or to his/her authorized representatives, or the persons entitled therefor, within one year as of the date of his/her

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resignation, separation or liquidation, the sum of money indicated in the documents that accredit his/her participation in the assets of the insurance cooperative. When, in the judgment of the Board, the total payment of said participation is damaging to the operations or financial stability of the insurance cooperative, and provided that the decision of the Board is based on objective criteria, the Board may pay in the following manner:

(a) Within one year of the death, resignation, separation or liquidation of the member, he/she or his/her authorized representatives or the person or persons entitled therefor shall be paid all interest initially contributed directly by the member in the form of capital.

(b) The remaining interest of the member shall be paid annually in proportion and according to the date in which he/she accrued said assets throughout the years. The assets so accrued shall be paid starting not later than one year after the death, resignation, separation or liquidation of the member and they shall be paid within not more than five (5) years. They shall continue to be paid in the manner described above during a period in addition to the one previously expressed, with the prior approval of the Insurance Commissioner of Puerto Rico. On any date of the aforementioned periods the Board may order the payment of the balance owed up to that date. If the total assets of the member cannot be paid in a revolving manner within the aforementioned period, the Board shall be bound to liquidate the excess of said accrual in a prorated manner or in a lump

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sum on any date within the indicated period. Certificates with a redemption date held by members who are retiring shall be liquidated on or before said date."

Section 10.- Article 34.090 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.090.- First Assembly of Members.- (1) As soon as contribution certificates in the amount of three fourths of the minimum surplus funds required have been paid, and as soon as three fourths of the total number of applications of members required to qualify for the original certificate of authority have been accepted, the Directors of the Cooperative Insurer being formed shall call the first assembly of members. The assembly shall be held in any city or town of Puerto Rico as stated in the Cooperative's articles of incorporation, and written notice of the date, time, place, and purposes of the assembly shall be sent to each such member, addressed to the member at his/her last address in record with the Cooperative, or delivered to him/her personally, not less than thirty (30) days prior to the date of the assembly. (2) The assembly shall consider and adopt cooperative bylaws of the insurance cooperative, elect directors with different terms of one, two or three years, according to the initial staggered system established in the Bylaws and shall transact such other business as may properly come before it for its consideration."

Section 11.- Article 34.100 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows:

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"Article 34.100.- Regular and Special Assemblies of Members.- The general assembly of members of insurance cooperatives shall be held in any city or town of the Island of Puerto Rico in which there are members.

Notice of said assembly shall be given not less than twenty (20) days in advance. The annual regular assembly shall fill the existing vacancies or those that occur on the Board of Directors, receive or consider reports of the officers of the Board of the insurance cooperative with regard to its business and shall resolve all other matters that are duly submitted by the members. Provided, that not more than thirteen (13) months shall elapse between one (1) regular assembly of members and the next.

No assembly of members may amend the articles of incorporation and the regulations of the insurance cooperative unless the proposal for its amendment has been included in the notice of the assembly.

The contents of the motions and resolutions presented in the assemblies shall be in harmony with the ends and purposes of the insurance cooperative, the laws and the bylaws. It is further provided that they shall be submitted duly approved by the Board of Directors of the members to the Board of the insurance cooperative within the period of time established in the bylaws, and in the absence thereof, as provided by the Board for its evaluation and recommendation to the assembly.

It shall be the duty of the board of directors to call a special general meeting of members when 10% of the members file with the secretary a petition, in writing, to hold such assembly and specifying the matters to be discussed thereat."

Section 12.- Article 34.110 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows:

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"Article 34.110.- Requirements and Impediments for Becoming a Director.-

When the members of the insurance cooperative are cooperatives, these shall have the right to nominate one of their members as candidate for director, provided that the affiliate cooperative complies with the duties and obligations of the members established in this Chapter. (1) Every director or candidate for director of an insurance cooperative shall comply, as of his/her nomination and during all of his/her incumbency, with the following requirements:

(a) Must have taken seminars on cooperativism. The candidate who aspires to be a director of the insurance cooperative for the first time, shall also take and approve during the first year of his/her incumbency an insurance course prepared by the insurance cooperative that has been submitted for the consideration of the Insurance Commissioner. The course shall include, at least, general principles of insurance, kinds of insurance marketed by the insurance cooperative and matters concerning the operations of the insurance cooperative. Every director shall participate in the continuing education program to be implemented by the insurance cooperative to ensure his/her permanent training.

(b) Must comply with all the requirements established in the bylaws of the insurance cooperative.

(c) Must be eligible for fidelity bond coverage.

(d) Shall be a resident of and actually reside in Puerto Rico.

(e) At least three fourths (3/4) must be American citizens.

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(2) The following shall be impediments for becoming the director of an insurance cooperative:

(a) Failure to comply with any of the requirements established in subsection 1 of this Article.

(b) Having declared bankruptcy at some time, whether voluntarily, involuntarily or fraudulently, or to have fraudulently executed a general assignment in the benefit of collectors.

(c) Having been convicted of a felony, a misdemeanor, or found liable in a civil action lawsuit, in both cases at the state or federal level, abroad or in his/her country of origin, for actions that imply illegal appropriation, fraud, moral depravity or any other serious criminal conduct.

(d) Being director or officer of any of the financial institutions described in Chapter 3 of this Code or of the Cooperative Bank of Puerto Rico. For purposes of this provision, an officer is any person who, by virtue of any designation or contract and by means of the payment of a salary, compensation or remuneration, fills a position that entails his/her participation in decision-making or in the design and implementation of the policies of the aforementioned financial institutions. This prohibition, however, shall not prevent a director of a cooperative credit union from also being the director of an insurance cooperative.

(e) Having direct or indirect economic interest in any noncooperative insurance company or any company whose business competes with that of the insurance cooperative.

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(f) Failure to comply with the bylaws adopted by the insurance cooperative and its Board of Directors to preserve integrity and avoid conflicts of interest in the performance of his/her duties as director of the insurance cooperative.

(g) Having been separated as a member from the Board or committee, or as officer of the administration of a cooperative or any other corporation, association or entity, for the causes established by the laws of the Commonwealth of Puerto Rico or by the laws of the United States, in any other international jurisdiction or in his/her country of origin. Provided, that the removal as a group due to syndication contemplated by the law shall not be considered to be an impediment with respect to the director concerned if he/she presents attesting proof of having been redressed or held harmless with respect to the reasons that caused the termination by the competent authority that executed said removal as a group.

(h) Any person who is a member of the Board of Directors of two (2) or more central entities of the Cooperative Movement of Puerto Rico, as defined in the bylaws of the insurance cooperative shall be hindered from becoming a member of the Board of Directors of the insurance cooperative at the same time.

(i) Having litigations or legally representing, in any venue, the moving party of a case against the insurance cooperative.

Should any of the aforementioned impediments arise while the director is performing his/her functions, it would disqualify him/her from continuing to be a director, in which case the Board of

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Directors shall continue the procedure established for the involuntary separation of members."

Section 13.- Article 34.120 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.120.- Election of Directors.- (1) The affairs of an insurance cooperative shall be administered by a Board of not less than five (5) nor more than thirteen (13) directors elected by the members from among them. (2) Each director shall be elected for a minimum term of one (1) year and a maximum of three (3) years, and until his/her successor is elected and takes office. The directors shall have the right to be re-elected to serve for three (3) terms of three (3) consecutive years. A minimum period of twenty-four (24) months must elapse from the expiration of the term, before a person who has been elected for three (3) consecutive terms can once again aspire to be a director of the insurance cooperative. (3) The names of the first provisional directors shall be listed in the articles of incorporation. Their successors shall be elected by the members at their first general assembly. (4) The number, qualifications, terms, and powers and faculties of the directors shall be those prescribed in the articles of incorporation and the bylaws of the insurance cooperative subject to the provisions of this Act. (5) The election shall be held by secret ballot, except for when only one candidate is nominated. (6) Vacancies that occur on the Board of Directors for any cause other than the expiration of the term of a director shall be filled by the

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remaining Board directors. The person thus selected to fill a vacancy on the Board shall hold office until his/her successor has been elected by the members at the next general regular or special assembly. Provided, that the time of incumbency of the director selected by the Board to fill the vacancy shall be considered to be a term as defined in this Chapter. (7) No director during his/her term of office shall be party to any lucrative contract with the insurance cooperative that differs in any way from the relation as insured. (8) Any member may request the removal of a director by the proffering of charges that shall be filed in writing, with the secretary or the president of the Board of the insurance cooperative accompanied by a petition signed by five (5) percent of all the members, requesting the removal of the director in question. Said request shall be submitted to the consideration of the next assembly of members, which may be a special session called for such purpose, which may remove the director by a majority vote of the members present. Provided, that such an assembly shall be held within a term of thirty (30) days from the filing of the request. The director against whom charges are proffered shall be notified of such charges in writing not less than fifteen (15) workdays prior to the assembly, and shall be given an opportunity to be heard at the assembly, in person or through counsel, and produce evidence; and the person or persons who have filed the charges against him/her shall have the same right."

Section 14.- A new Article 34.121 is hereby added to Act No. 77 of June 19, 1957, as amended, to read as follows:

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"Article 34.121.- Duties of the Directors in the Performance of Their Functions.

The directors of the insurance cooperative shall discharge their duties with the degree of care appropriate to the fiduciary relations they have toward the insurance cooperative. This fiduciary duty includes the duty of diligence and loyalty toward the insurance cooperative, as well as the duty to supervise and to give care as a good father of a family for the assets and the operations of the insurance cooperative.

No director or officer of an insurance cooperative shall accept, except for the insurer, nor shall he/she be the beneficiary of any fees, brokerage, donation or any other emolument by reason of any investment, loan, deposit, purchase, sale, exchange, reinsurance or any other transaction made by the insurance cooperative, or for himself/herself, nor shall he/she have any financial interest in said transactions in any capacity, except in representing the insurance cooperative.

This Article does not prohibit said director or officer from becoming a policyholder of the insurance cooperative and enjoying, in accordance with the policy, all the rights and privileges commonly and usually provided therein for the policyholders in general.

When the directors and officers of the Board have personal or representation interests in matters that somehow affect the insurance cooperative, they shall be subject to the duty of loyalty that compels them to act ethically and in harmony with the bylaws and norms of the insurance cooperative with respect to matters concerning the latter." Section 15.- Article 34.130 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows:

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"Article 34.130.- Board and Administration Officers.- (1) The Board shall elect its officers. Provided, that any director who is elected for the first time and who has no experience or studies in the field of insurance shall not be an officer of the Board. (2) The chief executive officer of the administration of the insurance cooperative does not have to be a member of an affiliate cooperative, but if he/she is, he/she may not be a proxy thereof at the same time. Provided, that such person shall not at the same time be a director of the Board of Directors of the insurance cooperative. (3) No director may receive any compensation or bonus as such director, beyond the assigned travel expenses and per diems during the days in which he/she may attend Board meetings or activities related to the insurance cooperative by direction of the Board itself, be it in the insurance area, or because of its nature as a cooperative. The directors shall be entitled to be reimbursed of the necessary expenses incurred by them in the performance of their officer duties. They shall also receive per diems for each meeting they attend or for each day they engage in activities thereof. The per diem to be received by the directors shall be established in the bylaws established by the Board for such purposes. The directors may be granted such life insurance or other insurance that shall protect the cooperative as well as the officer in his/her functions, without it being understood to a compensation or bonus. (4) No person may act as a director, an administration officer and an employee of the insurance cooperative at the same time. (5) Every administration officer or employee who in the performance of his/her duty intervenes with or handles cash shall furnish a bond.

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The amount of the bond shall be determined by the Board of Directors. The premium or cost of the bond shall be defrayed by the insurance cooperative."

Section 16.- Article 34.140 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.140.- Education. All the insurance cooperatives organized under this Code, shall be under obligation to set aside annually not less than one tenth $(1 / 10)$ of one percent $(1 %)$ of the total volume of premiums paid for purposes of cooperative education. Provided, that the insurance cooperatives may contribute voluntarily to the League of Cooperatives of Puerto Rico a part of all their funds for educational purposes, in order that the latter may intensify the work on cooperative education."

Section 17.- Article 34.150 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.150.- Social Reserve. The insurance cooperatives shall devote part of their net surplus available in an equitable manner to social programs such as hospitals, shelters or assistance programs for abused women and children, the terminally ill, elderly homes or centers, educational institutions and cooperative development programs that are directed to the development and growth of marginalized communities and groups. This reserve shall be established for a fixed annual amount, which means it shall not be a cumulative amount.

The use and administration of the social reserve shall be regulated by the Board of Directors of the insurance cooperative."

Section 18.- Article 34.160 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows:

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"Article 34.160.- Use of the term 'Cooperative.' No person, firm, corporation, or association in Puerto Rico other than a cooperative association organized under the laws in force shall have the right to use the terms 'cooperative,' 'cooperation,' 'cooperators' or words of similar meaning as a part of its name."

Section 19.- Article 34.170 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.170.- Insurance Cooperatives are not in restraint of trade: No insurance cooperative organized this Code shall, for the sole reason of being and acting in accordance with its cooperative nature, be deemed to be a conspiracy or a combination in restraint of trade or an illegal monopoly; neither shall it be considered organized for the purpose of lessening competition or fixing premiums arbitrarily; nor shall contracts executed between them and their members and other policyholders, or other contracts authorized or executed by virtue of the provisions of this Code, be construed as an unlawful restraint of trade or as part of a conspiracy or combination to carry out an improper or illegal purpose or act."

Section 20.- Article 34.180 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.180.- Tax Exemption (1) The Secretary of the Treasury of Puerto Rico is hereby directed to exempt from all property taxes the real and personal property belonging to insurance cooperatives duly organized under the provisions of this Code; Provided, that the exemption shall in no case exceed the assessed value of one million dollars $($ 1,000,000)$. (2) The tax exemption hereby authorized shall also include the stock issued by said cooperatives within the powers and faculties granted

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to them by this Code and the exemptions granted by the law to other types of cooperatives in Puerto Rico. (3) The insurance cooperatives that wish to avail themselves of the tax exemption may request from the Secretary of the Treasury of Puerto Rico exemption from the payment of taxes, accompanying the application by a statement of their properties and stock and the value thereof, the articles of incorporation, and all such data as the Secretary of the Treasury may require of the cooperative, in order to decide on the exemption. Once the resolution is issued, the insurers shall proceed to publish the same in a newspaper of general circulation in Puerto Rico. (4) The insurance cooperatives organized under this Code, being nonprofit associations, shall not be subject to the payment of income tax."

Section 21.- Article 34.191 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.191.- Acquisition of Stock Insurance cooperatives may organize and acquire other insurers and any other type of business, as provided in Chapter 6 or any other provision of this Code, by themselves or jointly with other cooperative institutions, for which they shall have the same powers and the same duties as the other insurers."

Section 22.- Article 34.192 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.192.- Impaired Assets.

1. If the assets of an insurance cooperative suffer impairment, the Commissioner shall immediately determine the amount of the deficiency and so notify the insurance cooperative to cover it,

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whether by requiring its members to make an additional contribution or in any other way, within ninety (90) days after being notified. 2. The deficiency shall be made up with cash or eligible assets pursuant to this Code for the investment of the funds of the insurance cooperative. 3. For the purposes of this Article, an insurance cooperative shall be considered as having impaired assets to the extent that its liabilities exceed its assets, both to be determined as provided in Chapter 5 of this Code, but including as liability any minimum surplus fund required to be maintained as authorization to transact the kinds of insurance underwritten. 4. If the deficiency is not covered, offering proof thereof to the Commissioner, within such ninety (90)-day term, the insurance cooperative shall be considered insolvent and proceeded against pursuant to the provisions of this Code. 5. If the deficiency is not made up, the insurer may not issue or deliver any policy after the expiration of such ninety (90)-day term. Any officer or director of the Board violating this provision or knowingly permitting the same to be violated shall incur a fine of not more than one thousand (1,000) dollars for each violation."

Section 23.- Article 34.193 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.193.- Assigning Quotas to Members to Cover Impairment of Assets. (1) If authorized by the vote of not less than two-thirds of the members of an insurance cooperative present at a special assembly

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called to said effect, the Board of Directors may impose a special prorated assessment on all contribution certificates issued by the insurance cooperative, to guarantee totally or partially the necessary funds to cover the impairment of assets, in accordance with the notification and requirement of the Commissioner, as provided in Article 34.192. (2) Written notice of such assessment shall be transmitted by registered mail to each one of such members to the last address registered in the insurance cooperative, requiring payment of such assessment before the expiration of the term of eighty-five (85) days.

Upon prior agreement of the Board of Directors and with the consent of the Commissioner, such notice may provide that if the member fails to pay the assessment when due his/her fund contribution certificates, or such part thereof as may be necessary to said effect, shall, on a date within the period of five (5) days after expiration of the term specified in the preceding paragraph, become property of the insurance cooperative. In no case may the insurance cooperative appropriate for itself contribution certificates of members whose contribution exceeds the assessment corresponding to said members. The appropriation of fund contribution certificates by the insurance cooperative in the prescribed manner shall be recorded upon the books of the insurance cooperative and shall be fully binding and operative upon all parties. Provided, that, as soon as the financial condition of the insurance cooperative so permits, the Board of Directors may proceed to accredit to members fund contribution certificates

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whose value shall in no case exceed the sums appropriated in the aforesaid manner. The insurance cooperative or its creditors shall have no further remedy against the member failing to pay the assessment thus imposed."

Section 24.- Article 34.200 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.200.- Persons related with other insurers.- No agent, solicitor, broker, adjuster, consultant or insurer related to insurers not organized under the provisions of this Act may belong as a member, nor acquire fund contribution certificates, nor organize an insurance cooperative as it is defined in this Chapter."

Section 25.- Article 34.210 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Section 34.210.- No natural or juridical person may be a member of an insurance cooperative under the provisions of this Chapter, if said person has had his/her license cancelled in accordance with the provisions of Chapter 9 of this Code, or is under investigation toward that end by the Insurance Commissioner of the Commonwealth of Puerto Rico."

Section 26.- Article 34.220 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.220.- The provisions in Chapter 28 of this Code, which regulate the Organization of Insurers, shall not apply to insurance cooperatives, with the exception of the Article that establishes a prohibition on constituting an insurer that depends on the payment of assessments, premiums for assessments or contributions made among its policyholders or members. Neither shall the provisions of Chapter 29 of this Code which regulate on the Corporate powers and procedures of Domestic Stock and Mutual Insurers

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apply, with the exception of the Articles on General Corporate Powers, on Regular and Special Assemblies, on Management and Exclusive Agency; Contracts, on Limitation of Expenses, Mutuals, on Accounts, Vouchers for Expenditures, on Borrowed Funds, on Repayment of Borrowed Funds, on Transactions in Other Countries, on Illegal Dividends, Penalties, on Merger or Consolidation, on Effect of Merger or Consolidation, on Voluntary Liquidation and Dissolution, on Voluntary Liquidation; Administration, on Voluntary Liquidation; Powers of the Commissioner, on Voluntary Liquidation; Certificate of Authority, on Voluntary Liquidation, Certificate of Dissolution, and on Filing of Certificate; Effective Date of Dissolution, inclusive.

Insurance cooperatives shall not be subject to the provisions of the General Corporation Law."

Section 27.- Article 34.230 of Act No. 77 of June 19, 1957, as amended, is hereby amended to read as follows: "Article 34.230.- All the provisions of this Code not expressly excepted shall apply to insurance cooperatives to the extent they are applicable. In aspects of a cooperative nature not covered by this Chapter, the first resort shall be the General Cooperative Associations Act, then the Savings and Credit Cooperatives Partnership Act, Cooperative Law, and last of all the Civil Code of Puerto Rico."

Section 28.- This Act shall take effect thirty (30) days after its approval. Insurance cooperatives shall take the necessary measures to adjust their bylaws and processes in order to comply with this Act.

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CERTIFICATION

I hereby certify to the Secretary of State that the following Act No. 174 (S.B. 2037) of the $6^{ ext {th }}$ Session of the $15^{ ext {th }}$ Legislature of Puerto Rico:

AN ACT to amend Articles 34.010; 34.020; 34.030; 34.040; 34.050; 34.060; 34.070; 34.080; 34.090; 34.100; 34.110; 34.120; 34.130; 34.140; 34.150; 34.160; 34.170; 34.180; 34.191; 34.192; 34.193; 34.200; 34.210; 34.220; and 34.230; to add Articles 34.011; 34.121; and 34.240 to Chapter 34 of Act No. 77 of June 19, 1957, as amended, known as the "Insurance Code of Puerto Rico," in order to adjust its provisions to the current reality of insurance cooperatives and to promote their development, has been translated from Spanish to English and that the English version is correct.

In San Juan, Puerto Rico, today $28^{ ext {th }}$ of August of 2008.

Francisco J. Domenech Director