Contract analysis

I. EXECUTIVE SUMMARY Calderwood & Harkness LLP ("C&H" or the "Firm") was retained by Stonefield Logistics Group Inc. ("SLG" or the "Company") on February 5, 2024, to evaluate the coverage position of SLG under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023 (the "Policy"), issued by Meridian Surety & Indemnity Company ("Meridian"), following Meridian's January 22, 2024 denial of SLG's $4,780,000 ca

II. SCOPE OF ENGAGEMENT AND MATERIALS REVIEWED A. Scope of Engagement Pursuant to the engagement letter executed on February 5, 2024, between SLG and Calderwood & Harkness LLP, the Firm's engagement encompasses the following: (i) evaluation of the coverage available to SLG under Meridian Policy No. IML-TX-0039821-2023 in connection with the November 17, 2023 fire loss; (ii) preparation of a comprehensive coverage opi

1. The Policy. Meridian Surety & Indemnity Company Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023, effective April 1, 2023 through March 31, 2024, including all endorsements, schedules, declarations pages, and any amendments thereto (collectively, the "Policy").

2. Reservation of Rights Letter. Letter from Patricia Ng, Vice President of Claims, Meridian Surety & Indemnity Company, to Dale Engstrom, Vice President of Risk Management, Stonefield Logistics Group Inc., dated December 4, 2023, setting forth Meridian's reservation of rights under the Policy and identifying Exclusion 4(k) (Failure to Maintain) as the sole coverage defense under investigation at that time.

3. Denial Letter. Letter from Patricia Ng, Vice President of Claims, Meridian Surety & Indemnity Company, to Dale Engstrom, Vice President of Risk Management, Stonefield Logistics Group Inc., dated January 22, 2024, denying SLG's claim in its entirety and asserting Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain) as the bases for denial.

4. Sworn Proof of Loss. SLG's sworn proof of loss dated February 1, 2024, prepared by Sandra Whitlock, CPA, CFF, of Whitlock & Associates, CPAs, P.C., Midland, Texas, documenting total cargo losses of $4,780,000 supported by shipping manifests, purchase orders, market-rate valuations, and other corroborating documentation.

5. Ridgeline Forensic Report. Ridgeline Forensic Consultants LLC independent origin-and-cause investigation report dated March 15, 2024, prepared by Dr. William Creech, P.E., CFEI, a licensed professional engineer and certified fire and explosion investigator (the "Ridgeline Report"). The Ridgeline Report identifies the fire origin as an electrical fault in the Building C main distribution panel and addresses the per

6. Warehouse Layout Plan. SLG Warehouse Layout Plan, Revision 7, dated June 2023, depicting the internal bay configuration, cargo segregation zones, and buffer areas within Building C of the Midland Facility.

7. Midland Fire Department Report. Midland Fire Department Incident Report No. MFD-2023-4417, dated November 17, 2023, documenting the department's response to the fire, arrival time, suppression activities, and the determination that Building C was a total structural loss.

8. Sprinkler Inspection Records. Quarterly visual sprinkler inspection records for Building C maintained by SLG, documenting inspections conducted on December 15, 2022; March 20, 2023; June 12, 2023; and September 8, 2023, all in compliance with NFPA 25 Section 5.2.1.

9. Annual Full-Flow Test Report. Lone Star Fire Protection Inc. annual full-flow test report for the Building C wet-pipe automatic sprinkler system, dated September 14, 2022, documenting the most recent annual inspection conducted in accordance with NFPA 25 Section 5.3.2.

10. Lone Star Engagement Letter. SLG engagement letter to Lone Star Fire Protection Inc., dated August 28, 2023, scheduling and confirming an appointment for the next annual full-flow test for November 20, 2023.

11. Shipper Documentation. Shipping instructions, safety data sheets ("SDS"), purchase orders, and shipping manifests from Cantera Chemical Supply Co. ("Cantera"), Permian Wellhead Services LLC ("Permian Wellhead"), and Triton Subsurface Technologies Inc. ("Triton"), together with miscellaneous shipper documentation for remaining freight stored in Building C at the time of the fire.

12. Insurance Placement File. SLG insurance placement file from Calvert & Strauss Insurance Brokers, Inc. ("Calvert & Strauss"), maintained by Jason Muñoz, Account Executive, including policy applications, underwriting submissions, correspondence with Meridian, and broker-of-record documentation.

13. Claims Correspondence. Correspondence between SLG (Dale Engstrom, Vice President of Risk Management) and Meridian (Brian Woolf, Senior Claims Examiner) during the claim adjustment period from November 2023 through January 2024, including requests for documentation, inspection scheduling, and related communications. We have not independently verified the financial figures set forth in the sworn proof of loss prepa

III. FACTUAL BACKGROUND A. The Insured — Stonefield Logistics Group Inc. Stonefield Logistics Group Inc. is a Texas corporation, Federal Employer Identification Number 84-3291057, headquartered at 2900 Petroleum Tower Boulevard, Suite 400, Midland, TX 79701. SLG is a mid-market intermodal freight brokerage, trucking, and transload/warehousing company operating fourteen (14) terminals across Texas, New Mexico, and Okl

IV. COVERAGE ANALYSIS A. The Insuring Agreement — All-Risk Coverage The Policy provides all-risk coverage for "direct physical loss or damage to cargo in the care, custody, or control of the Insured arising out of or in connection with the Insured's transportation, warehousing, or transloading operations." The significance of the all-risk formulation is well established under Texas law: an all-risk policy covers ever

1. Text of the Exclusion Exclusion 4(f) of the Policy provides: "This Policy does not cover loss or damage resulting from the Insured's storage of cargo in a manner inconsistent with the shipper's written storage instructions or applicable industry standards." This exclusion operates to bar coverage only when two conditions are satisfied: (1) the insured stored cargo in a manner that was inconsistent with either the

2. Meridian's Position In its January 22, 2024 denial letter, Meridian alleged that SLG stored casing pipe and chemicals in the same warehouse bay, in violation of (a) the shippers' written storage instructions and (b) the segregation requirements set forth in OSHA regulations at 29 CFR 1910.106, which Meridian characterized as "applicable industry standards" within the meaning of Exclusion 4(f). As noted in Section

3. Analysis and Rebuttal Exclusion 4(f) is inapplicable to this loss for multiple, independent reasons. a. No Co-Storage Occurred. Meridian's invocation of Exclusion 4(f) is predicated on the factual assertion that SLG stored casing pipe and chemicals in the same warehouse bay. This assertion is categorically false. As detailed in Section III.F above, SLG's Warehouse Layout Plan, Revision 7, dated June 2023, establis

4. Conclusion on Exclusion 4(f) Exclusion 4(f) does not apply to the November 17, 2023 fire loss. SLG's storage practices at the Midland Facility were fully compliant with all shipper written storage instructions and applicable industry standards. The factual premise of Meridian's assertion — that casing pipe and chemicals were co-stored in the same bay — is affirmatively refuted by both the Layout Plan and the Ridge

1. Text of the Exclusion Exclusion 4(k) of the Policy provides: "This Policy does not cover loss or damage caused by or resulting from the Insured's failure to maintain fire protection, detection, or suppression systems in the facility where cargo is stored, in accordance with applicable codes and manufacturer specifications." This exclusion contains two operative elements. First, the insured must have "fail[ed] to m

2. Meridian's Position In both its December 4, 2023 Reservation of Rights letter and its January 22, 2024 denial letter, Meridian alleged that SLG failed to maintain the sprinkler system in Building C in accordance with NFPA 25, citing the fact that the most recent annual full-flow test was conducted on September 14, 2022, and the next annual test was not completed by the September 14, 2023 anniversary date. The fire

3. Analysis and Rebuttal Exclusion 4(k) is inapplicable for multiple independent reasons, any one of which standing alone would defeat Meridian's defense. a. SLG Substantially Complied with NFPA 25. The characterization of SLG's sprinkler maintenance record as a "failure to maintain" is misleading and does not withstand scrutiny. SLG's compliance with NFPA 25 was extensive and substantially complete: Quarterly Visual

4. Conclusion on Exclusion 4(k) Exclusion 4(k) does not apply to the November 17, 2023 fire loss. SLG substantially complied with NFPA 25 by completing all quarterly visual inspections and proactively scheduling the annual full-flow test with the earliest available contractor date. The fire did not originate in, or bear any relationship to, the sprinkler system. The sprinkler system activated during the fire. The lim

V. COMPLIANCE WITH POLICY CONDITIONS We have independently verified SLG's compliance with the Policy's conditions precedent to coverage, and we confirm that all material conditions have been satisfied. A. Notice of Loss (Section 8(a))

Section 8(a) of the Policy requires the insured to provide written notice of loss to the insurer within thirty (30) days of the occurrence giving rise to the claim. SLG provided timely written notice of the November 17, 2023 fire to Meridian well within the 30-day period prescribed by the Policy. This condition is satisfied, and Meridian has not disputed the timeliness or sufficiency of SLG's notice of loss at any po

Section 8(c) of the Policy requires the insured to submit a sworn proof of loss within ninety (90) days of the occurrence giving rise to the claim. SLG submitted its sworn proof of loss to Meridian on February 1, 2024 — seventy-seven (77) days after the November 17, 2023 fire — well within the 90-day deadline. The sworn proof of loss was prepared by Sandra Whitlock, CPA, CFF, of Whitlock & Associates, CPAs, P.C., and

VI. EXPOSURE TO STATUTORY PENALTIES AND BAD-FAITH LIABILITY In addition to its contractual right to indemnity under the Policy, SLG has significant statutory remedies available under the Texas Insurance Code that materially increase Meridian's exposure and strengthen SLG's negotiating position. These statutory remedies arise from Meridian's failure to promptly pay a valid claim and from the circumstances surrounding

1. Statutory Framework The Texas Prompt Payment of Claims Act, codified at Texas Insurance Code Chapter 542, Subchapter B, establishes mandatory timelines for the investigation, acceptance, and payment of insurance claims. The statute is remedial in nature and is to be liberally construed to effectuate its purpose of ensuring that insurers pay valid claims promptly and do not profit from unreasonable delay. The key p

Section 542.055 — Request for Information. Upon receiving notice of a claim, the insurer must commence its investigation and, not later than the 15th day after the date it receives the notice, request from the claimant all items, statements, and forms that the insurer reasonably believes will be required from the claimant.

Section 542.056 — Acceptance or Rejection of Claim. The insurer must notify the claimant in writing of the acceptance or rejection of the claim not later than the 15th business day after the date the insurer receives all items, statements, and forms required by the insurer. If the insurer is unable to accept or reject the claim within this period, the insurer must notify the claimant of the reasons additional time is

Section 542.058 — Payment of Claim. If the insurer fails to comply with the deadlines prescribed by Sections 542.055 and 542.056, the insurer is liable for the amount of the claim, plus interest on the amount of the claim at the rate of 18% per annum, plus reasonable attorney's fees.

Section 542.060 — Computation of Penalty Interest. The statutory penalty interest of 18% per annum begins to accrue on the date the insurer is required to pay the claim under the applicable statutory timeline and continues until the date the claim is paid.

2. Application to This Claim SLG submitted its sworn proof of loss to Meridian on February 1, 2024. Assuming Meridian had all information reasonably needed to evaluate the claim by that date — or shortly thereafter — the statutory clock under Section 542.056 began to run. Applying the maximum extension periods permitted by the statute, we estimate that Meridian's deadline to accept or reject the claim on the merits,

1. Statutory Framework Chapter 541 of the Texas Insurance Code prohibits certain unfair methods of competition and unfair or deceptive acts or practices in the business of insurance. Section 541.060 specifically addresses unfair settlement practices, including but not limited to: (1) Misrepresenting to a claimant a material fact or policy provision relating to coverage at issue; (2) Failing to attempt in good faith t