Contract analysis

I. Executive Summary Calderwood & Harkness LLP was engaged on February 5, 2024, by Stonefield Logistics Group Inc. ("SLG"), a Texas corporation headquartered at 2900 Petroleum Tower Boulevard, Suite 400, Midland, TX 79701, to evaluate its coverage claim under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023 (the "Policy") issued by Meridian Surety & Indemnity Company ("Meridian"), an Ohio-domiciled

II. Background — The Insured and the Policy A. Stonefield Logistics Group Inc. Stonefield Logistics Group Inc. is a mid-market intermodal freight brokerage, trucking, and transload/warehousing company operating primarily across the Permian Basin and surrounding regions. SLG currently maintains fourteen terminals across Texas, New Mexico, and Oklahoma, and its core business specializes in Permian Basin oilfield supply

Section 8(a) requires the Named Insured to provide written notice to the insurer "as soon as practicable, but in no event later than thirty (30) days after the Insured becomes aware of any loss or damage which may give rise to a claim under this Policy."

Section 8(c) requires the Named Insured to submit a sworn proof of loss "within ninety (90) days after the date of loss," containing a detailed statement of the cargo destroyed or damaged, the circumstances of the loss, and the amount claimed. SLG complied with both provisions. SLG's notice of loss was submitted within days of the November 17, 2023 fire, facilitated by Calvert & Strauss, and was received by Meridian

III. The Loss Event — November 17, 2023 Fire A. Factual Summary On November 17, 2023, at approximately 2:14 a.m. CST, a fire broke out in Warehouse Building C at SLG's Midland Facility. The fire appears to have originated in the area of the Building C main electrical distribution panel, a Square D Model QED-2 unit that was installed when Building C was constructed in 2011. The Square D Model QED-2 is a widely used lo

IV. Procedural History of the Claim A. Notice and Reservation of Rights As noted above, SLG timely notified Meridian of the loss in late November 2023. The notice was transmitted through SLG's insurance broker, Calvert & Strauss, and was received by Meridian within the 30-day notice period prescribed by Section 8(a) of the Policy. On December 4, 2023, Meridian issued a Reservation of Rights letter to SLG, acknowledgi

1. Exclusion 4(f) (Improper Storage): Meridian alleged that SLG stored casing pipe and completion chemicals in the same warehouse bay, in violation of the shipper's written storage instructions and in contravention of OSHA 29 CFR 1910.106 segregation requirements for the storage of flammable and combustible liquids. Meridian contended that this co-storage constituted storage "in a manner inconsistent with the shipper

2. Exclusion 4(k) (Failure to Maintain): Meridian alleged that SLG failed to maintain the Building C sprinkler system in accordance with applicable codes and manufacturer specifications, citing the fact that the last annual full-flow inspection of the sprinkler system (per NFPA 25 § 5.3.2) was performed on September 14, 2022, and was not repeated by September 14, 2023 — creating an alleged lapse of over two months at

V. Preliminary Analysis of Exclusion 4(f) — Improper Storage A. Meridian's Position In its January 22, 2024 denial letter, Meridian contends that SLG stored casing pipe and completion chemicals in the same warehouse bay within Building C, in violation of two standards: (1) the shipper's written storage instructions, and (2) OSHA 29 CFR 1910.106, which governs the storage and handling of flammable and combustible liqu

1. SLG's Warehouse Layout. SLG's Warehouse Layout Plan, Revision 7, dated June 2023 (the most current revision prior to the fire), designates separate and distinct storage zones within Building C for different categories of cargo. Specifically, the Warehouse Layout Plan provides for the following allocation of storage bays: • Bays 1–4: Casing pipe and tubular goods • Bays 5–8: Tools, equipment, and miscellaneous frei

2. Nature of the Chemicals — Class IIIB Combustible Liquids. A critical flaw in Meridian's invocation of Exclusion 4(f) is its apparent mischaracterization of the chemicals stored in Building C. Meridian's denial letter refers broadly to "completion chemicals" and implies that these materials are "flammable" substances subject to the segregation requirements of OSHA 29 CFR 1910.106. However, a review of the Safety Da

3. Shipper Instructions. Meridian's denial letter alleges that SLG stored cargo "in a manner inconsistent with the shipper's written storage instructions" but does not identify which shipper's instructions were allegedly violated. Our review of the available shipper instructions has focused on Cantera Chemical Supply Co., the owner of the completion chemicals stored in Building C. Cantera Chemical Supply Co.'s writte

VI. Preliminary Analysis of Exclusion 4(k) — Failure to Maintain A. Meridian's Position Meridian's denial letter contends that SLG failed to maintain the Building C sprinkler system in accordance with applicable codes and manufacturer specifications, as required by the Policy. Specifically, Meridian alleges that the annual full-flow test of the sprinkler system, required by NFPA 25, Standard for the Inspection, Testi

1. SLG's Compliance with NFPA 25 Quarterly Inspections. While the annual full-flow test was overdue at the time of the fire, SLG maintained full compliance with the quarterly visual inspection requirements of NFPA 25 § 5.2.1 throughout the relevant period. Quarterly visual inspections are a separate and independent maintenance requirement under NFPA 25, requiring the building owner or operator to visually inspect spr

2. Annual Full-Flow Test — Scheduled but Not Yet Performed. The circumstances surrounding the delayed annual full-flow test further undercut Meridian's Exclusion 4(k) defense. The annual full-flow test was last performed on September 14, 2022, by Lone Star Fire Protection Inc. ("Lone Star FP"), a licensed fire protection contractor based in Midland, Texas, which SLG had retained for sprinkler system testing and maint

3. Causation Requirement — Exclusion 4(k) Language. Perhaps the most significant weakness in Meridian's Exclusion 4(k) defense is the exclusion's express causation requirement. Unlike Exclusion 4(f), which is triggered by storage "inconsistent with" specified standards (a compliance-based formulation), Exclusion 4(k) requires that the loss be "caused by or resulting from" the insured's failure to maintain fire protec

VII. Potential Extracontractual Claims Under the Texas Insurance Code In addition to the contractual coverage claim under the Policy, the circumstances of Meridian's denial give rise to potential extracontractual claims under the Texas Insurance Code. We address these potential claims below on a preliminary basis. A more thorough analysis will be included in the comprehensive coverage opinion to be prepared upon rece

VIII. Key Documents Reviewed to Date In preparing this preliminary assessment, we have reviewed the following documents and materials:

1. Meridian Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023, including the full policy form, all endorsements, and the declarations page.

2. Meridian Reservation of Rights letter to Stonefield Logistics Group Inc., dated December 4, 2023, issued by Senior Claims Examiner Brian Woolf.

3. Meridian Coverage Denial letter to Stonefield Logistics Group Inc., dated January 22, 2024, signed by Vice President of Claims Patricia Ng.

4. Stonefield Logistics Group Inc. Sworn Proof of Loss, submitted February 1, 2024, prepared with the assistance of Whitlock & Associates, Certified Public Accountants, P.C. (Engagement Partner: Sandra Whitlock, CPA, CFF).

5. Stonefield Logistics Group Inc. Warehouse Layout Plan, Revision 7, dated June 2023.

6. Stonefield Logistics Group Inc. Quarterly Sprinkler Inspection Reports for Building C, dated December 15, 2022; March 20, 2023; June 12, 2023; and September 8, 2023.

7. Lone Star Fire Protection Inc. engagement letter from Stonefield Logistics Group Inc., dated August 28, 2023, confirming an inspection appointment for November 20, 2023.

8. Midland Fire Department Incident Report (preliminary), relating to the November 17, 2023 fire at 4501 East County Road 130, Midland, TX 79706.

9. Safety Data Sheets (SDS) for Cantera Chemical Supply Co. completion chemicals stored in Building C at the time of the fire.

10. Cantera Chemical Supply Co. written storage instructions for completion chemicals delivered to SLG's Midland Facility. We have also conducted initial interviews with Dale Engstrom, SLG's VP of Risk Management, and Jason Muñoz, SLG's account executive at Calvert & Strauss Insurance Brokers, Inc. These interviews were conducted under the protection of the attorney-client privilege.

IX. Outstanding Information Needs While the documents and information reviewed to date support a strong preliminary assessment of SLG's coverage position, several outstanding information needs must be addressed before we can issue a comprehensive coverage opinion. These needs are summarized below in order of priority.

1. Independent Forensic Origin-and-Cause Investigation. This is the most critical outstanding need. An independent forensic investigation is essential to establish, to a reasonable degree of scientific certainty, that the fire originated in the Building C main electrical distribution panel (Square D Model QED-2), to identify the specific mechanism of electrical failure, and to evaluate the sprinkler system's performa

2. Complete Shipper Storage Instructions. We need to obtain and review the complete set of written storage instructions for all cargo stored in Building C at the time of the loss — not just the Cantera Chemical Supply Co. instructions. If any shipper's instructions contained restrictions that SLG did not comply with, that fact could affect our analysis of Exclusion 4(f). Dale Engstrom should be asked to compile and p

3. Confirmation of Cargo Segregation at Time of Fire. While Dale Engstrom has confirmed that the Warehouse Layout Plan, Revision 7, was adhered to at the time of the fire, this representation should be corroborated through independent forensic mapping of the Building C layout as it existed at the time of the fire. Forensic mapping may be possible through analysis of the fire debris pattern, surviving warehouse manage

4. Municipal Water-Pressure Records. We should obtain records from the City of Midland's water utility confirming the actual water pressure at or near the Midland Facility on November 17, 2023, and any history of low-pressure events in the eastern Midland industrial corridor. These records will be important in establishing that the sprinkler system's inadequate performance was attributable to the municipal water-supp

5. Lone Star Fire Protection Inc. Records. We should obtain documentation from Lone Star Fire Protection Inc. confirming the scheduling backlog that prevented completion of the annual full-flow test prior to November 17, 2023, and corroborating the November 20, 2023 appointment date referenced in SLG's August 28, 2023 engagement letter. This documentation may include internal scheduling records, correspondence betwee

6. Meridian's Claim File. We should consider whether and when to request production of Meridian's internal claim file, including all adjuster notes, correspondence, investigation reports, and communications with outside counsel (KBH). In the event of litigation, the claim file will be discoverable (subject to work-product and attorney-client privilege objections), and its contents may be probative of Meridian's good

X. Recommendation — Retention of Ridgeline Forensic Consultants LLC Based on the foregoing analysis, we strongly recommend that SLG retain Ridgeline Forensic Consultants LLC ("Ridgeline") to conduct an independent origin-and-cause investigation of the November 17, 2023 fire. Ridgeline is located at 9100 Sovereign Row, Suite 210, Dallas, TX 75247, and specializes in forensic fire and explosion investigation for commer

1. Fire origin and cause analysis: Determination of the precise origin and cause of the November 17, 2023 fire, including identification of the mechanism of failure in the Square D Model QED-2 electrical distribution panel.

2. Electrical distribution panel evaluation: Detailed forensic examination of the Square D Model QED-2 unit, including analysis of recovered components, arc mapping, and assessment of the panel's installation history, maintenance records, and known failure modes.

3. Sprinkler system performance assessment: Evaluation of the Building C wet-pipe automatic sprinkler system's performance during the fire, with specific attention to the impact of the municipal water-pressure deficit (36 psi actual vs. 52 psi design) on system efficacy. This assessment should include a determination of whether a fully code-compliant sprinkler system operating at design pressure would have been capab

4. Forensic mapping of warehouse layout: Documentation and mapping of the Building C cargo layout as it existed at the time of the fire, to the extent determinable from physical evidence, surviving records, and witness interviews, for purposes of confirming compliance with SLG's Warehouse Layout Plan, Revision 7. The engagement should be structured as a retention at the direction of counsel in anticipation of litigat

XI. Next Steps and Timeline Based on the preliminary analysis set forth in this memorandum, we recommend the following action items and timeline:

1. Immediate (this week — week of February 19, 2024): Obtain authorization from Dale Engstrom and/or Howard Bellamy to retain Ridgeline Forensic Consultants LLC. Upon authorization, prepare and transmit the engagement letter to Dr. William Creech at Ridgeline, with appropriate privilege and work-product protections. Simultaneously, request that Dale Engstrom compile and produce the complete set of shipper storage ins

2. February – March 2024: Ridgeline conducts its site investigation at the Midland Facility, performs laboratory analysis of recovered electrical components, completes hydraulic modeling of the sprinkler system, and prepares its forensic report. We estimate approximately three to four weeks from the date of engagement for Ridgeline to complete its investigation and deliver a draft report for our review.

3. Upon receipt of the Ridgeline forensic report: Complete the comprehensive coverage opinion memorandum for delivery to SLG. The comprehensive coverage opinion will address in full detail: (a) the contractual coverage analysis under the Policy, including the insuring agreement and all potentially applicable exclusions; (b) the extracontractual claims available to SLG under Texas Insurance Code Chapters 541 and 542;

4. Following delivery of the comprehensive coverage opinion: Prepare and transmit a formal demand letter to Meridian. The demand letter should be addressed to Patricia Ng, Vice President of Claims, Meridian Surety & Indemnity Company, 600 Scioto Crossing, Suite 1200, Columbus, OH 43215, with a copy to Victoria Kessler at Kessler, Brandt & Howe LLP, 1401 McKinney Street, Suite 2800, Houston, TX 77010. The demand lette

5. Pending Meridian's response to the demand letter: Evaluate Meridian's response and determine the appropriate next steps. Options include: (a) negotiated settlement, if Meridian makes a reasonable offer; (b) mediation, which may be productive given the strength of SLG's position and Meridian's extracontractual exposure; or (c) direct filing of suit in state court (likely Midland County District Court or, alternativ

6. Budget note: Our current estimated fee budget for the pre-litigation phase of this engagement — through and including the forensic investigation, comprehensive coverage opinion, demand letter, and negotiation/mediation — is $175,000 to $225,000. This estimate includes Calderwood & Harkness attorney time, the Ridgeline forensic engagement ($38,500), and anticipated expenses. A separate litigation budget will be pre

XII. Conclusion Based on our preliminary analysis, SLG has a strong coverage claim under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023. Both exclusions invoked by Meridian in its January 22, 2024 denial appear inapplicable on the facts currently available: • Exclusion 4(f) (Improper Storage) is undermined by the warehouse layout evidence showing separate storage zones for pipe and chemicals with