Contract analysis

I. Introduction and Purpose of Letter This firm represents Stonefield Logistics Group Inc. ("SLG"), a Texas corporation with its principal place of business at 2900 Petroleum Tower Boulevard, Suite 400, Midland, Texas 79701 (FEIN 84-3291057), in connection with SLG's claim for cargo loss under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023 (the "Policy") issued by Meridian Surety & Indemnity Compa

II. Summary of the Policy The relevant terms and provisions of the Policy are summarized as follows: The Policy provides all-risk coverage, as expressly stated in Section II (Insuring Agreement), which reads in pertinent part: "The Company agrees to pay on behalf of the Insured all sums which the Insured becomes legally obligated to pay as damages arising from all risks of direct physical loss or damage to cargo in t

III. The Loss Event — November 17, 2023 A. Chronology of the Fire At approximately 2:14 a.m. CST on November 17, 2023, a fire broke out in Warehouse Building C at SLG's Midland Facility, located at 4501 East County Road 130, Midland, Texas 79706. The fire was first detected by SLG's automated fire alarm monitoring system, which transmitted an alert to the Midland Central Dispatch at 2:15 a.m. CST. The Midland Fire De

1. Origin. The fire originated in the Building C main electrical distribution panel, a Square D Model QED-2, which was installed during the original construction of the building in 2011. Arc mapping and physical evidence analysis identified the panel as the area of origin with a high degree of confidence.

2. Cause. The cause of the fire was an electrical arc fault within the main distribution panel. The arc fault ignited adjacent combustible packaging materials (primarily corrugated cardboard and polyethylene shrink wrap) that were stored in proximity to the panel. The arc fault was the product of age-related degradation of internal bus bar connections, a known failure mode for this model of distribution panel.

3. Storage Practices Not a Cause. The fire was not caused by any storage practice, cargo arrangement, or warehouse layout employed by SLG. The fire originated in the electrical panel, not in any stored cargo, and the spread of the fire was governed by the intensity of the electrical ignition source and the structural characteristics of the building — not by the arrangement of cargo within the warehouse bays.

4. Sprinkler System Performance Not a Cause. The wet-pipe automatic sprinkler system in Building C activated during the fire, as designed. However, the sprinkler system's suppression efficacy was substantially limited by a municipal water-supply pressure deficit. The system was designed to operate at 52 psi; however, the actual municipal water-supply pressure on the night of the fire was only 36 psi — a deficit of ap

IV. Meridian's Denial Is Without Merit On January 22, 2024, Meridian issued a letter denying coverage for SLG's claim (signed by Claims Examiner Brian Harker), invoking two policy exclusions: Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain Fire Protection Systems). Both asserted exclusions are factually unsupported and legally without merit, for the reasons set forth below. As a threshold ma

1. Text of the Exclusion. Exclusion 4(f) of the Policy reads in full as follows: "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 for the type of cargo involved."

2. Meridian's Position. In its January 22, 2024 denial letter, Meridian asserted that SLG stored casing pipe and completion chemicals in the same warehouse bay, allegedly in violation of shipper instructions and in contravention of the segregation requirements set forth in the Occupational Safety and Health Administration's regulations at 29 C.F.R. § 1910.106, which governs the storage and handling of flammable and c

3. Rebuttal — Warehouse Layout. Meridian's factual premise is simply wrong. SLG's Warehouse Layout Plan, Revision 7, issued in June 2023 (enclosed herewith as Enclosure 3), designated the storage areas within Building C as follows: • Bays 1 through 4: Pipe storage (including casing, tubing, and drill pipe) • Bays 5 through 8: Tools and equipment storage (designated buffer zone) • Bays 9 through 12: Chemical pallets a

4. Rebuttal — OSHA Inapplicability. Even if Meridian's factual premise were correct — which it is not — the regulatory basis for Meridian's position is also without foundation. Meridian cited 29 C.F.R. § 1910.106 as the "applicable industry standard" with which SLG allegedly failed to comply. However, this regulation does not support Meridian's argument. The completion chemicals stored in Building C — as documented i

5. Conclusion on Exclusion 4(f). For the reasons set forth above, Meridian cannot establish that SLG stored cargo "in a manner inconsistent with the shipper's written storage instructions or applicable industry standards." The undisputed facts demonstrate that (a) casing pipe and completion chemicals were stored in separate, physically segregated warehouse bays with a forty-foot buffer zone, fully consistent with the

1. Text of the Exclusion. Exclusion 4(k) of the Policy reads in full as follows: "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."

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 Building C sprinkler system in accordance with applicable codes. Specifically, Meridian noted that the most recent annual full-flow inspection of the sprinkler system was conducted on September 14, 2022, and that under NFPA 25 (Standard for the Insp

3. Rebuttal — SLG's Maintenance Record. Meridian's characterization of SLG's sprinkler maintenance record is misleading and incomplete. SLG maintained a robust and substantially compliant maintenance program for the Building C sprinkler system. The full record demonstrates SLG's diligence, not negligence. SLG conducted all required quarterly visual inspections of the sprinkler system in accordance with NFPA 25 § 5.2.

4. Rebuttal — No Causal Nexus. Even assuming, arguendo, that the approximately two-month delay in the annual full-flow test could be characterized as a "failure to maintain" the sprinkler system (which SLG expressly does not concede), Exclusion 4(k) still does not apply because Meridian cannot establish the required causal connection between the alleged failure and the loss. The text of Exclusion 4(k) requires that t

1. The fire originated in the electrical distribution panel (Square D Model QED-2), not in the sprinkler system. The sprinkler system did not cause the fire, and no deficiency in the sprinkler system contributed to the ignition of the fire.

2. The sprinkler system did activate during the fire. The system functioned mechanically as designed. Sprinkler heads in the area of origin and adjacent zones discharged water in response to the heat generated by the fire. The issue was not that the sprinkler system failed to operate; the issue was that the municipal water-supply pressure was insufficient to provide the design flow rate needed for effective suppressi

3. The limitation on the sprinkler system's suppression efficacy was caused by the municipal water-supply pressure deficit (36 psi actual versus 52 psi design), not by any failure of the sprinkler system itself. The water-supply pressure deficit was a municipal infrastructure issue entirely outside of SLG's control.

4. Even a fully code-compliant sprinkler system, recently inspected and having passed an annual full-flow test with satisfactory results, would not have prevented the loss given the documented municipal water-supply pressure deficit. An annual full-flow test evaluates the mechanical condition and flow characteristics of the sprinkler system itself; it does not — and cannot — address deficiencies in the external munic

5. Conclusion on Exclusion 4(k). SLG's maintenance record for the Building C sprinkler system was substantially compliant with NFPA 25. SLG performed all four required quarterly inspections on schedule, and it proactively engaged a licensed contractor to perform the annual full-flow inspection before the anniversary date. The approximately two-month delay in the full-flow inspection was attributable to the contractor

V. Texas Insurance Code — Unfair Settlement Practices and Prompt-Payment Penalties Meridian's handling of SLG's claim raises serious concerns under multiple provisions of the Texas Insurance Code. SLG expressly reserves all rights and remedies under these provisions. A. Texas Insurance Code Chapter 541 — Unfair Settlement Practices Meridian's conduct in the investigation and denial of SLG's claim raises substantial c

VI. Demand Based on the foregoing, and in accordance with the express terms of the Policy and applicable provisions of Texas law, Stonefield Logistics Group Inc. hereby formally demands that Meridian Surety & Indemnity Company pay the full net indemnity amount of Four Million Five Hundred Thirty Thousand Dollars ($4,530,000.00) — representing $4,780,000.00 in verified cargo losses, less the $250,000.00 per-occurrence

VII. Reservation of Rights Nothing in this letter shall be construed as a waiver of any of SLG's rights, claims, or remedies under the Policy, at law, or in equity, all of which are expressly reserved in full. Without limiting the generality of the foregoing, SLG specifically reserves its right to assert any and all causes of action arising from Meridian's conduct in the investigation, handling, and denial of this cl

VIII. Closing We respectfully request that Meridian and its counsel direct all further communications regarding this matter to the undersigned at the address, telephone number, and email address set forth below. Please do not contact SLG personnel directly regarding this claim without first coordinating through this office. We remain willing to discuss this matter with you or your designated counsel in advance of the