1012-00003 · Stonefield Logistics Group · Correspondence

formal-demand-letter-to-meridian.docx DOCUMENT Litigation

7 / 12 ← → ✕

CALDERWOOD & HARKNESS LLP Attorneys at Law

700 Louisiana Street, Suite 4500

April 12, 2024

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AND ELECTRONIC MAIL

Ms. Patricia Ng Vice President of Claims Meridian Surety & Indemnity Company 600 Scioto Crossing, Suite 1200 Columbus, OH 43215

Re: Formal Demand for Payment Under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023

Our Client: Stonefield Logistics Group Inc.

Date of Loss: November 17, 2023

Claim Amount: $4,530,000.00

Our Matter No.: 1012-00003

Dear Ms. Ng:

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 Company ("Meridian," NAIC No. 28471). We have been authorized by SLG to act on its behalf in all matters relating to this claim, and we request that all further correspondence and communications concerning this matter be directed to the undersigned.

This letter constitutes a formal demand for the immediate payment of Four Million Five Hundred Thirty Thousand Dollars ($4,530,000.00), representing the total verified cargo loss of $4,780,000.00 less the $250,000.00 per-occurrence self-insured retention ("SIR") provided for under the Policy. This amount is due and owing to SLG under the express terms of the Policy, and Meridian's continued refusal to pay constitutes a breach of its contractual obligations and a violation of applicable provisions of the Texas Insurance Code.

As you are aware, SLG submitted its sworn proof of loss on February 1, 2024, prepared under the direction of Whitlock & Associates, Certified Public Accountants, P.C. (Sandra Whitlock, CPA, CFF, engagement partner). The sworn proof of loss was accompanied by comprehensive documentation supporting both the occurrence of the covered loss and the value of the cargo destroyed. The proof of loss was submitted in strict compliance with the Policy's claim-submission requirements and within the time periods specified therein.

Notwithstanding the clear and unambiguous coverage afforded by the Policy, Meridian denied coverage by letter dated January 22, 2024, signed by Claims Examiner Brian Harker, invoking Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain Fire Protection Systems). For the reasons set forth in detail below, both asserted exclusions are factually unsupported and legally without merit. The denial reflects a fundamental misunderstanding — or deliberate mischaracterization — of the facts underlying this loss, and it is our firm conclusion that Meridian's liability under the Policy has become reasonably clear.

We demand a full and substantive response to this letter, including the unconditional tender of the net indemnity amount of $4,530,000.00, within thirty (30) calendar days of the date of this letter — that is, on or before May 12, 2024. Failure to respond within that period will leave SLG no alternative but to initiate litigation to recover all amounts owed under the Policy, together with all statutory penalties, interest, attorney's fees, and other relief available under Texas law.

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 the care, custody, or control of the Insured arising out of or in connection with the Insured's transportation, warehousing, or transloading operations, subject to the terms, conditions, exclusions, and limitations set forth herein."

The all-risk nature of the Policy is significant. Under well-established Texas law, an all-risk policy covers every loss that is not specifically excluded, and the insurer bears the burden of proving that a claimed loss falls within a policy exclusion. The Policy was negotiated at arm's length, placed by a qualified insurance broker, and issued in consideration of a substantial annual premium of $174,600.00, reflecting the scope and breadth of coverage purchased by SLG.

It is important to note that the net claim of $4,530,000.00 is well within the $5,000,000.00 per-occurrence limit and the $10,000,000.00 annual aggregate limit. Moreover, SLG has made no prior claims during the current policy period, leaving the aggregate limit fully intact. There is no dispute regarding the timeliness of premium payments, the effective dates of coverage, or SLG's status as the named insured under the Policy. The loss occurred on November 17, 2023, squarely within the policy period.

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 Department dispatched units from Station 4 and Station 7, and the first responding units arrived on scene at approximately 2:31 a.m. CST — approximately seventeen minutes after the alarm was transmitted.

Upon arrival, responding firefighters found Building C fully involved, with heavy fire and smoke issuing from the roof and all four sides of the structure. Additional units were called to the scene, and the fire was ultimately contained by approximately 4:45 a.m. CST. Final overhaul and investigation continued through the morning hours of November 17, 2023. The Midland Fire Department's official incident report (Incident No. MFD-2023-11849) classified the fire as accidental in origin.

Building C was a pre-engineered metal warehouse structure of approximately 24,000 square feet, constructed in 2011 and used by SLG for the warehousing and temporary storage of oilfield cargo awaiting delivery to customers in the Permian Basin region. The building was declared a total structural loss. The structural damage to Building C, estimated at $1,350,000.00, is covered under a separate commercial property insurance policy and is not at issue in this claim. The present claim relates solely to the cargo that was destroyed in the fire.

SLG provided prompt notice of the loss to Meridian. SLG's Vice President of Risk Management, Dale Engstrom, notified Calvert & Strauss Insurance Brokers, Inc. of the loss by telephone at approximately 7:00 a.m. CST on November 17, 2023, and Meridian's claims department was notified by Calvert & Strauss the same day. Written notice of loss was transmitted to Meridian by SLG via certified mail and electronic mail on November 20, 2023 — the first business day following the weekend after the loss.

B. Origin and Cause — Ridgeline Forensic Report

In order to independently establish the origin and cause of the fire, Calderwood & Harkness retained Ridgeline Forensic Consultants LLC ("Ridgeline"), a nationally recognized forensic investigation firm with offices at 9100 Sovereign Row, Suite 210, Dallas, Texas 75247. The investigation was led by Dr. William Creech, P.E., CFEI, a licensed professional engineer and certified fire and explosion investigator with over twenty-five years of experience in the investigation of industrial and commercial fire losses. Dr. Creech was supported by a team of three additional investigators and an electrical engineer.

Ridgeline's investigation included a comprehensive physical examination of the fire scene (conducted over the course of three days, from November 27 through November 29, 2023), a review of all available photographic and video evidence, interviews with SLG personnel and responding firefighters, analysis of the fire alarm system data logs, examination of the remains of the Building C electrical distribution system, and a thorough review of SLG's maintenance records, building plans, and operational procedures.

Ridgeline's final report, delivered on March 15, 2024 (enclosed herewith as Enclosure 1), reached the following conclusions, stated to a reasonable degree of engineering certainty:

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 approximately 31%. This pressure deficit was attributable to conditions in the City of Midland's municipal water distribution system and was entirely outside of SLG's control. Even a fully code-compliant sprinkler system, recently inspected and operating at peak mechanical condition, would not have prevented the loss given the documented water-supply pressure deficit.

The Ridgeline report is thorough, well-documented, and methodologically sound. Its conclusions are consistent with the Midland Fire Department's own determination that the fire was accidental and electrical in origin. To our knowledge, Meridian has not retained its own independent origin-and-cause expert, nor has Meridian identified any factual basis for disputing the conclusions of the Ridgeline report.

C. Sprinkler System Performance

Warehouse Building C was equipped with a wet-pipe automatic sprinkler system that was designed and installed in 2011 in compliance with the National Fire Protection Association Standard 13 (Standard for the Installation of Sprinkler Systems) ("NFPA 13"). The system was designed for the specific occupancy classification and commodity storage configuration of the warehouse, and it was operational at the time of the fire.

The sprinkler system activated during the fire event, with multiple sprinkler heads discharging water in the area of origin and in adjacent zones. However, as documented in the Ridgeline forensic report, the municipal water-supply pressure delivered to the building on the night of the fire was only 36 psi — well below the 52 psi design parameter for the sprinkler system. This represented a water-supply pressure deficit of approximately 31%, which substantially limited the volume of water discharged and the suppression capability of the system.

The inadequate water-supply pressure was a municipal infrastructure issue entirely outside of SLG's control. SLG does not own, operate, or maintain the municipal water distribution system. SLG had no notice or warning that the municipal water-supply pressure would be deficient on the night of the fire, and there is no evidence that SLG could have taken any action to prevent or mitigate the pressure deficit. The water-supply pressure issue was subsequently confirmed by the City of Midland Public Utilities Department, which acknowledged that below-normal system pressures were experienced across portions of the eastern Midland water distribution grid during the early morning hours of November 17, 2023, due to ongoing system maintenance and demand fluctuations.

D. Cargo Destroyed — Verified Values

The cargo destroyed in the fire was verified and valued by Whitlock & Associates, Certified Public Accountants, P.C., in the sworn proof of loss submitted to Meridian on February 1, 2024 (enclosed herewith as Enclosure 2). The cargo consisted of oilfield equipment, supplies, and materials belonging to multiple shippers, all of which was in the care, custody, and control of SLG at the time of the fire pursuant to SLG's transportation and warehousing service agreements. The following is a summary of the destroyed cargo:

The cargo values set forth above were verified by Whitlock & Associates through examination of shipper invoices, purchase orders, warehouse receipts, bill-of-lading records, and inventory management system data. Each cargo owner confirmed the quantities and values of its respective goods. The sworn proof of loss was executed under penalty of perjury by SLG's Chief Financial Officer, Karen Lassiter, and attested by Sandra Whitlock, CPA, CFF, engagement partner at Whitlock & Associates.

After application of the $250,000.00 per-occurrence SIR, the net claim under the Policy is $4,530,000.00.

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 matter, we note a significant procedural irregularity in Meridian's handling of this claim. Meridian issued a Reservation of Rights letter dated December 4, 2023, approximately seventeen days after SLG's initial notice of loss. That Reservation of Rights letter cited only Exclusion 4(k) (Failure to Maintain) as a potential coverage defense. Exclusion 4(f) (Improper Storage) was not mentioned. Exclusion 4(f) was raised for the first time in the January 22, 2024 denial letter — nearly seven weeks later — apparently without the benefit of any adequate investigation into the storage practices at the Midland Facility. This belated and apparently unsupported invocation of an additional exclusion raises serious concerns under the Texas Insurance Code, particularly Section 541.060, as discussed in Section V below.

A. Exclusion 4(f) — Improper Storage — Does Not Apply

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 combustible liquids. Meridian contended that this alleged improper storage practice brought the loss within the scope of Exclusion 4(f).

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 and packaged materials

This layout established a minimum separation of approximately forty (40) feet between the pipe storage bays (Bays 1–4) and the chemical storage bays (Bays 9–12), with a dedicated buffer zone of tools and equipment storage (Bays 5–8) in between. The layout was designed specifically to ensure adequate segregation between pipe and chemical cargo, and it was consistently adhered to in practice.

Post-fire forensic mapping conducted by Ridgeline Forensic Consultants — based on physical evidence, pre-fire photographs, and warehouse management system records — confirmed that SLG maintained this separation at the time of the fire. The 312 joints of casing pipe owned by Permian Wellhead Services LLC were stored in Bays 2 and 3. The 47 pallets of completion chemicals owned by Cantera Chemical Supply Co. were stored in Bays 10 and 11. Casing pipe and chemicals were never co-located in the same bay or in adjacent bays at any time.

Meridian has offered no evidence to the contrary. Its assertion that casing pipe and chemicals were stored "in the same warehouse bay" appears to be based on speculation or a misunderstanding of the warehouse layout, rather than on any actual investigation of the facts. If Meridian conducted a site inspection or reviewed the Warehouse Layout Plan before issuing its denial, there is no indication of such review in its denial letter.

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 in the Safety Data Sheets ("SDS") provided by Cantera Chemical Supply Co. (enclosed herewith as Enclosure 6) — were classified as Class IIIB combustible liquids, with flash points exceeding 200°F. Cantera Chemical Supply Co.'s written shipper instructions required "segregation from incompatible materials per SDS" — a requirement that SLG fully satisfied through the warehouse layout described above.

OSHA's regulation at 29 C.F.R. § 1910.106 governs the storage and handling of "flammable and combustible liquids" and imposes specific and detailed segregation requirements for flammable liquids (Class I) and higher-hazard combustible liquids (Class II and Class IIIA). However, Class IIIB combustible liquids — those with flash points at or above 200°F — are subject to materially less restrictive treatment under the regulation. The stringent segregation requirements that Meridian cited in its denial letter — including minimum separation distances and the requirement for dedicated storage rooms or cabinets — simply do not apply to Class IIIB combustible liquids.

Moreover, the completion chemicals were stored in their original sealed packaging, on pallets, in accordance with the manufacturer's and shipper's instructions. There was no requirement under 29 C.F.R. § 1910.106 or any other applicable standard to isolate these materials from pipe, tools, or other non-incompatible commodities stored in the same warehouse.

SLG complied with the shipper's written storage instructions and all applicable industry standards in all material respects. There is no factual or regulatory basis for Meridian's assertion to the contrary.

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 Warehouse Layout Plan and shipper instructions; and (b) the OSHA regulation cited by Meridian does not impose the segregation requirements that Meridian alleges were violated.

Exclusion 4(f) is inapplicable to this loss as a matter of both fact and law, and Meridian's reliance on this exclusion as a basis for denial is without merit.

B. Exclusion 4(k) — Failure to Maintain — Does Not Apply

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 Inspection, Testing, and Maintenance of Water-Based Fire Protection Systems), the annual re-inspection should have been performed by September 14, 2023. Because no annual full-flow inspection had been completed between September 14, 2022, and the date of the fire on November 17, 2023, Meridian contended that SLG "failed to maintain" the sprinkler system as required, thereby triggering Exclusion 4(k).

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 § 5.2.1, on the following dates:

• December 15, 2022

• March 20, 2023

• June 12, 2023

• September 8, 2023

Records of each of these inspections are enclosed herewith as Enclosure 4. Each quarterly inspection was conducted by qualified SLG maintenance personnel, documented on standardized inspection forms, and retained in SLG's records. No deficiencies requiring corrective action were identified during any of these quarterly inspections.

The most recent annual full-flow test, as required by NFPA 25 § 5.3.2, was performed on September 14, 2022, by Lone Star Fire Protection Inc., a licensed fire protection contractor. The system passed the full-flow test with satisfactory results at that time.

SLG was fully aware of the approaching deadline for the next annual full-flow test and took proactive steps to schedule the inspection in advance. By written engagement letter dated August 28, 2023 — more than two weeks before the September 14, 2023 anniversary date — SLG engaged Lone Star Fire Protection Inc. to perform the annual full-flow inspection (enclosed herewith as Enclosure 5). Lone Star Fire Protection Inc. confirmed receipt of the engagement and scheduled the inspection for November 20, 2023.

The delay from the September 14, 2023 anniversary date to the November 20, 2023 scheduled inspection date — a period of approximately two months — was attributable solely to the contractor's scheduling backlog. Lone Star Fire Protection Inc. is a high-demand contractor serving the Permian Basin oilfield services industry, and scheduling delays of this nature are common in the region. The delay was not caused by any neglect, indifference, or cost-cutting on SLG's part. To the contrary, SLG engaged the contractor in advance of the deadline and accepted the earliest available date.

The fire occurred on November 17, 2023 — only three (3) days before the scheduled annual full-flow inspection of November 20, 2023. The proximity of these dates further underscores the fact that SLG was not delinquent in its maintenance obligations; it was actively in the process of fulfilling them when the fire occurred.

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 the loss be "caused by or resulting from" the insured's failure to maintain the fire protection system. This is a causation requirement. It is not a mere compliance-based trigger. The exclusion does not apply simply because a maintenance task was overdue; the exclusion applies only if the alleged maintenance failure caused or contributed to the loss.

Under Texas law, it is well established that an insurer invoking a policy exclusion bears the burden of proving that the exclusion applies. Drayton Insurance. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991) ("To avoid liability under a policy exclusion, an insurer has the burden to plead and prove the applicability of the exclusion."). This burden includes proving not only that the factual predicate for the exclusion is satisfied, but also that the causal nexus required by the exclusion's language exists.

Meridian cannot carry this burden. The Ridgeline forensic report unequivocally established the following:

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 suppression.

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 municipal water supply. Whether or not the annual full-flow test had been performed before the fire would have had no bearing on the sprinkler system's performance during this fire event, because the system's suppression capability was constrained by the inadequate external water pressure, not by any internal system deficiency.

In short, there is no causal relationship between the delay in the annual full-flow inspection and the loss that occurred. The sprinkler system's inability to suppress the fire was caused by an external water-supply pressure deficit, not by any condition that an annual full-flow test would have identified, remedied, or prevented. Meridian cannot satisfy the "caused by or resulting from" language of Exclusion 4(k), and the exclusion therefore does not apply.

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's scheduling backlog — not to any neglect, willfulness, or disregard on SLG's part — and the inspection was scheduled to occur only three days after the fire.

Even if the two-month delay in the annual full-flow test could be characterized as a "failure to maintain" — which SLG does not concede — Meridian cannot demonstrate that such delay caused or contributed to the loss in any way. The fire was caused by an electrical arc fault in the distribution panel, and the sprinkler system's inability to suppress the fire was caused by a municipal water-supply pressure deficit, neither of which is related to the timing of the annual full-flow test.

Exclusion 4(k) is inapplicable to this loss, and Meridian's reliance on this exclusion as a basis for denial is without merit.

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 concerns under Texas Insurance Code Chapter 541, Subchapter B, which prohibits certain unfair methods of competition and unfair or deceptive acts or practices in the business of insurance. In particular, Section 541.060 of the Texas Insurance Code identifies specific acts that constitute unfair settlement practices, including but not limited to:

• § 541.060(a)(2)(A): Failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer's liability has become reasonably clear;

• § 541.060(a)(7): Refusing to pay a claim without conducting a reasonable investigation with respect to the claim.

As set forth in detail in this letter, SLG's claim is clearly covered under the all-risk insuring agreement of the Policy, and neither of the exclusions invoked by Meridian has any factual or legal basis. Meridian's liability has become reasonably clear, and its continued refusal to pay constitutes a failure to effectuate a prompt, fair, and equitable settlement in violation of § 541.060(a)(2)(A).

Moreover, Meridian's invocation of Exclusion 4(f) (Improper Storage) raises particular concern. The December 4, 2023 Reservation of Rights letter cited only Exclusion 4(k) (Failure to Maintain) as a potential coverage defense. Exclusion 4(f) was raised for the first time in the January 22, 2024 denial letter — nearly seven weeks later. This strongly suggests that Meridian invoked Exclusion 4(f) without conducting an adequate factual investigation into SLG's storage practices, in direct contravention of § 541.060(a)(7). Had Meridian conducted a reasonable investigation — including a review of the Warehouse Layout Plan, the warehouse management system records, and the shipper instructions and Safety Data Sheets — it would have been apparent that the storage practices at the Midland Facility fully complied with shipper instructions and applicable industry standards. The belated and unsupported assertion of this exclusion as a basis for denial is precisely the type of conduct that Chapter 541 is designed to prevent.

Available remedies under Chapter 541 include actual damages sustained as a result of the unfair or deceptive act or practice, and in the case of knowing violations, the court may award up to three times the amount of actual damages (treble damages). Tex. Ins. Code § 541.152. In addition, a prevailing plaintiff is entitled to recover court costs and reasonable and necessary attorney's fees. Id.

B. Texas Insurance Code Chapter 542 — Prompt Payment of Claims

Texas Insurance Code Chapter 542, Subchapter B (the "Prompt Payment of Claims Act"), establishes mandatory deadlines for the handling and payment of insurance claims, and imposes significant statutory penalties on insurers that fail to comply.

SLG submitted its sworn proof of loss to Meridian on February 1, 2024. Under Texas Insurance Code § 542.056, Meridian was required to accept or reject the claim not later than the fifteenth (15th) business day after the date the insurer received all items, statements, and forms reasonably requested and required under Section 542.055. SLG provided all requested documentation in a timely manner and is not aware of any outstanding requests for additional information from Meridian.

Under Texas Insurance Code § 542.058, if an insurer that is liable for a claim under an insurance policy is not in compliance with the deadlines established by Chapter 542, the insurer is liable to pay the policyholder, in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent per annum as damages, together with reasonable attorney's fees. Tex. Ins. Code § 542.060.

Based on the February 1, 2024 submission date of the sworn proof of loss, and applying the statutory timelines set forth in Chapter 542, the deadline for Meridian to accept or reject the claim and tender payment passed no later than approximately April 29, 2024 (the 61st calendar day after February 1, 2024, calculated in accordance with §§ 542.055–542.058). Statutory penalty interest at the rate of 18% per annum on the net claim amount of $4,530,000.00 began accruing on or about that date.

To put the magnitude of this exposure in perspective, 18% per annum interest on $4,530,000.00 equates to approximately $815,400.00 per year, or approximately $2,233.97 per day. This statutory interest continues to accrue each day that Meridian fails to make payment, and it is in addition to — not a substitute for — the principal claim amount and any other remedies available under Texas law.

As of the date of this letter, penalty interest has already begun to accumulate and will grow substantially with each passing day that payment remains outstanding. We strongly urge Meridian to take this exposure into account in evaluating its coverage position.

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 self-insured retention — within thirty (30) calendar days of the date of this letter, that is, on or before May 12, 2024.

Payment should be made by wire transfer to the trust account of Calderwood & Harkness LLP, with wire instructions to be provided upon Meridian's confirmation of payment.

In addition, SLG expressly reserves all rights and remedies under Texas Insurance Code Chapters 541 and 542, including but not limited to:

• Statutory penalty interest at the rate of 18% per annum under Tex. Ins. Code § 542.060, accruing from the date payment was due and continuing until the date of actual payment;

• Actual damages for unfair settlement practices under Tex. Ins. Code § 541.060;

• Treble damages for knowing violations under Tex. Ins. Code § 541.152;

• Reasonable and necessary attorney's fees and costs incurred in connection with the prosecution of SLG's claim.

If Meridian fails to respond to this demand within the stated period, or if Meridian's response is anything other than an unconditional acceptance of the claim and tender of the full net indemnity amount, SLG will have no alternative but to initiate litigation in the appropriate court in Midland County, Texas, seeking recovery of all amounts owed under the Policy, together with all available contractual and statutory remedies, including but not limited to penalty interest, treble damages, attorney's fees, and costs of court.

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 claim, including but not limited to breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code and the Texas Deceptive Trade Practices—Consumer Protection Act.

SLG's willingness to resolve this matter through pre-litigation negotiation, and its decision to provide Meridian with an opportunity to reconsider its coverage position and tender payment before the institution of legal proceedings, should not be construed as an acquiescence to Meridian's coverage position, a limitation on SLG's claims, or a waiver of any right or remedy.

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 May 12, 2024 deadline in an effort to resolve SLG's claim without the necessity of litigation. However, we want to be clear that the passage of the deadline without payment will result in the immediate commencement of legal proceedings.

We look forward to your prompt response.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Bellamy Partner

700 Louisiana Street, Suite 4500 Houston, Texas 77002 Telephone: (713) 654-8217 Facsimile: (713) 654-8201

Email: hbellamy@calderwoodharkness.com

cc: (via First Class Mail and Electronic Mail)

Victoria Kessler, Esq. Kessler, Brandt & Howe LLP 1401 McKinney Street, Suite 2800 Houston, TX 77010

Marcus D. Stonefield, Chief Executive Officer Stonefield Logistics Group Inc. (via electronic mail)

Dale Engstrom, Vice President of Risk Management Stonefield Logistics Group Inc. (via electronic mail)

Enclosures:

Enclosure 1: Ridgeline Forensic Consultants LLC — Origin and Cause Investigation Report (March 15, 2024)

Enclosure 2: Whitlock & Associates, Certified Public Accountants, P.C. — Sworn Proof of Loss and Cargo Valuation (February 1, 2024)

Enclosure 3: SLG Warehouse Layout Plan, Revision 7 (June 2023)

Enclosure 4: SLG Quarterly Sprinkler Inspection Records (December 2022 – September 2023)

Enclosure 5: Lone Star Fire Protection Inc. — Engagement Letter (August 28, 2023)

Enclosure 6: Cantera Chemical Supply Co. — Safety Data Sheets and Written Shipper Instructions

Policy Element	Detail
Named Insured	Stonefield Logistics Group Inc.
Policy Number	IML-TX-0039821-2023
Policy Period	April 1, 2023 – March 31, 2024
Insurer	Meridian Surety & Indemnity Company, an Ohio-domiciled stock insurance company; A.M. Best Rating: A (Excellent); Financial Size Category IX
Per-Occurrence Limit	$5,000,000.00
Annual Aggregate Limit	$10,000,000.00
Self-Insured Retention	$250,000.00 per occurrence
Annual Premium	$174,600.00
Placing Broker	Calvert & Strauss Insurance Brokers, Inc. (Jason Muñoz, Account Executive)
Cargo Description	Owner	Verified Value
312 joints of 5-1/2" P-110 casing pipe	Permian Wellhead Services LLC	$1,842,000.00
47 pallets of completion chemicals	Cantera Chemical Supply Co.	$1,126,500.00
18 crates of downhole tools and sensors	Triton Subsurface Technologies Inc.	$987,000.00
Miscellaneous freight (multiple shippers)	Various	$824,500.00
Total Cargo Value	$4,780,000.00

CALDERWOOD & HARKNESS LLP Attorneys at Law
700 Louisiana Street, Suite 4500 | Houston, Texas 77002 Telephone: (713) 654-8200 | Facsimile: (713) 654-8201 www.calderwoodharkness.com
April 12, 2024
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AND ELECTRONIC MAIL
Ms. Patricia Ng Vice President of Claims Meridian Surety & Indemnity Company 600 Scioto Crossing, Suite 1200 Columbus, OH 43215
Re: Formal Demand for Payment Under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023
Our Client: Stonefield Logistics Group Inc.
Date of Loss: November 17, 2023
Claim Amount: $4,530,000.00
Our Matter No.: 1012-00003
Dear Ms. Ng:
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 Company ("Meridian," NAIC No. 28471). We have been authorized by SLG to act on its behalf in all matters relating to this claim, and we request that all further correspondence and communications concerning this matter be directed to the undersigned.
This letter constitutes a formal demand for the immediate payment of Four Million Five Hundred Thirty Thousand Dollars ($4,530,000.00), representing the total verified cargo loss of $4,780,000.00 less the $250,000.00 per-occurrence self-insured retention ("SIR") provided for under the Policy. This amount is due and owing to SLG under the express terms of the Policy, and Meridian's continued refusal to pay constitutes a breach of its contractual obligations and a violation of applicable provisions of the Texas Insurance Code.
As you are aware, SLG submitted its sworn proof of loss on February 1, 2024, prepared under the direction of Whitlock & Associates, Certified Public Accountants, P.C. (Sandra Whitlock, CPA, CFF, engagement partner). The sworn proof of loss was accompanied by comprehensive documentation supporting both the occurrence of the covered loss and the value of the cargo destroyed. The proof of loss was submitted in strict compliance with the Policy's claim-submission requirements and within the time periods specified therein.
Notwithstanding the clear and unambiguous coverage afforded by the Policy, Meridian denied coverage by letter dated January 22, 2024, signed by Claims Examiner Brian Harker, invoking Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain Fire Protection Systems). For the reasons set forth in detail below, both asserted exclusions are factually unsupported and legally without merit. The denial reflects a fundamental misunderstanding — or deliberate mischaracterization — of the facts underlying this loss, and it is our firm conclusion that Meridian's liability under the Policy has become reasonably clear.
We demand a full and substantive response to this letter, including the unconditional tender of the net indemnity amount of $4,530,000.00, within thirty (30) calendar days of the date of this letter — that is, on or before May 12, 2024. Failure to respond within that period will leave SLG no alternative but to initiate litigation to recover all amounts owed under the Policy, together with all statutory penalties, interest, attorney's fees, and other relief available under Texas law.
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 the care, custody, or control of the Insured arising out of or in connection with the Insured's transportation, warehousing, or transloading operations, subject to the terms, conditions, exclusions, and limitations set forth herein."
The all-risk nature of the Policy is significant. Under well-established Texas law, an all-risk policy covers every loss that is not specifically excluded, and the insurer bears the burden of proving that a claimed loss falls within a policy exclusion. The Policy was negotiated at arm's length, placed by a qualified insurance broker, and issued in consideration of a substantial annual premium of $174,600.00, reflecting the scope and breadth of coverage purchased by SLG.
It is important to note that the net claim of $4,530,000.00 is well within the $5,000,000.00 per-occurrence limit and the $10,000,000.00 annual aggregate limit. Moreover, SLG has made no prior claims during the current policy period, leaving the aggregate limit fully intact. There is no dispute regarding the timeliness of premium payments, the effective dates of coverage, or SLG's status as the named insured under the Policy. The loss occurred on November 17, 2023, squarely within the policy period.
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 Department dispatched units from Station 4 and Station 7, and the first responding units arrived on scene at approximately 2:31 a.m. CST — approximately seventeen minutes after the alarm was transmitted.
Upon arrival, responding firefighters found Building C fully involved, with heavy fire and smoke issuing from the roof and all four sides of the structure. Additional units were called to the scene, and the fire was ultimately contained by approximately 4:45 a.m. CST. Final overhaul and investigation continued through the morning hours of November 17, 2023. The Midland Fire Department's official incident report (Incident No. MFD-2023-11849) classified the fire as accidental in origin.
Building C was a pre-engineered metal warehouse structure of approximately 24,000 square feet, constructed in 2011 and used by SLG for the warehousing and temporary storage of oilfield cargo awaiting delivery to customers in the Permian Basin region. The building was declared a total structural loss. The structural damage to Building C, estimated at $1,350,000.00, is covered under a separate commercial property insurance policy and is not at issue in this claim. The present claim relates solely to the cargo that was destroyed in the fire.
SLG provided prompt notice of the loss to Meridian. SLG's Vice President of Risk Management, Dale Engstrom, notified Calvert & Strauss Insurance Brokers, Inc. of the loss by telephone at approximately 7:00 a.m. CST on November 17, 2023, and Meridian's claims department was notified by Calvert & Strauss the same day. Written notice of loss was transmitted to Meridian by SLG via certified mail and electronic mail on November 20, 2023 — the first business day following the weekend after the loss.
B. Origin and Cause — Ridgeline Forensic Report
In order to independently establish the origin and cause of the fire, Calderwood & Harkness retained Ridgeline Forensic Consultants LLC ("Ridgeline"), a nationally recognized forensic investigation firm with offices at 9100 Sovereign Row, Suite 210, Dallas, Texas 75247. The investigation was led by Dr. William Creech, P.E., CFEI, a licensed professional engineer and certified fire and explosion investigator with over twenty-five years of experience in the investigation of industrial and commercial fire losses. Dr. Creech was supported by a team of three additional investigators and an electrical engineer.
Ridgeline's investigation included a comprehensive physical examination of the fire scene (conducted over the course of three days, from November 27 through November 29, 2023), a review of all available photographic and video evidence, interviews with SLG personnel and responding firefighters, analysis of the fire alarm system data logs, examination of the remains of the Building C electrical distribution system, and a thorough review of SLG's maintenance records, building plans, and operational procedures.
Ridgeline's final report, delivered on March 15, 2024 (enclosed herewith as Enclosure 1), reached the following conclusions, stated to a reasonable degree of engineering certainty:
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 approximately 31%. This pressure deficit was attributable to conditions in the City of Midland's municipal water distribution system and was entirely outside of SLG's control. Even a fully code-compliant sprinkler system, recently inspected and operating at peak mechanical condition, would not have prevented the loss given the documented water-supply pressure deficit.
The Ridgeline report is thorough, well-documented, and methodologically sound. Its conclusions are consistent with the Midland Fire Department's own determination that the fire was accidental and electrical in origin. To our knowledge, Meridian has not retained its own independent origin-and-cause expert, nor has Meridian identified any factual basis for disputing the conclusions of the Ridgeline report.
C. Sprinkler System Performance
Warehouse Building C was equipped with a wet-pipe automatic sprinkler system that was designed and installed in 2011 in compliance with the National Fire Protection Association Standard 13 (Standard for the Installation of Sprinkler Systems) ("NFPA 13"). The system was designed for the specific occupancy classification and commodity storage configuration of the warehouse, and it was operational at the time of the fire.
The sprinkler system activated during the fire event, with multiple sprinkler heads discharging water in the area of origin and in adjacent zones. However, as documented in the Ridgeline forensic report, the municipal water-supply pressure delivered to the building on the night of the fire was only 36 psi — well below the 52 psi design parameter for the sprinkler system. This represented a water-supply pressure deficit of approximately 31%, which substantially limited the volume of water discharged and the suppression capability of the system.
The inadequate water-supply pressure was a municipal infrastructure issue entirely outside of SLG's control. SLG does not own, operate, or maintain the municipal water distribution system. SLG had no notice or warning that the municipal water-supply pressure would be deficient on the night of the fire, and there is no evidence that SLG could have taken any action to prevent or mitigate the pressure deficit. The water-supply pressure issue was subsequently confirmed by the City of Midland Public Utilities Department, which acknowledged that below-normal system pressures were experienced across portions of the eastern Midland water distribution grid during the early morning hours of November 17, 2023, due to ongoing system maintenance and demand fluctuations.
D. Cargo Destroyed — Verified Values
The cargo destroyed in the fire was verified and valued by Whitlock & Associates, Certified Public Accountants, P.C., in the sworn proof of loss submitted to Meridian on February 1, 2024 (enclosed herewith as Enclosure 2). The cargo consisted of oilfield equipment, supplies, and materials belonging to multiple shippers, all of which was in the care, custody, and control of SLG at the time of the fire pursuant to SLG's transportation and warehousing service agreements. The following is a summary of the destroyed cargo:
The cargo values set forth above were verified by Whitlock & Associates through examination of shipper invoices, purchase orders, warehouse receipts, bill-of-lading records, and inventory management system data. Each cargo owner confirmed the quantities and values of its respective goods. The sworn proof of loss was executed under penalty of perjury by SLG's Chief Financial Officer, Karen Lassiter, and attested by Sandra Whitlock, CPA, CFF, engagement partner at Whitlock & Associates.
After application of the $250,000.00 per-occurrence SIR, the net claim under the Policy is $4,530,000.00.
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 matter, we note a significant procedural irregularity in Meridian's handling of this claim. Meridian issued a Reservation of Rights letter dated December 4, 2023, approximately seventeen days after SLG's initial notice of loss. That Reservation of Rights letter cited only Exclusion 4(k) (Failure to Maintain) as a potential coverage defense. Exclusion 4(f) (Improper Storage) was not mentioned. Exclusion 4(f) was raised for the first time in the January 22, 2024 denial letter — nearly seven weeks later — apparently without the benefit of any adequate investigation into the storage practices at the Midland Facility. This belated and apparently unsupported invocation of an additional exclusion raises serious concerns under the Texas Insurance Code, particularly Section 541.060, as discussed in Section V below.
A. Exclusion 4(f) — Improper Storage — Does Not Apply
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 combustible liquids. Meridian contended that this alleged improper storage practice brought the loss within the scope of Exclusion 4(f).
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 and packaged materials
This layout established a minimum separation of approximately forty (40) feet between the pipe storage bays (Bays 1–4) and the chemical storage bays (Bays 9–12), with a dedicated buffer zone of tools and equipment storage (Bays 5–8) in between. The layout was designed specifically to ensure adequate segregation between pipe and chemical cargo, and it was consistently adhered to in practice.
Post-fire forensic mapping conducted by Ridgeline Forensic Consultants — based on physical evidence, pre-fire photographs, and warehouse management system records — confirmed that SLG maintained this separation at the time of the fire. The 312 joints of casing pipe owned by Permian Wellhead Services LLC were stored in Bays 2 and 3. The 47 pallets of completion chemicals owned by Cantera Chemical Supply Co. were stored in Bays 10 and 11. Casing pipe and chemicals were never co-located in the same bay or in adjacent bays at any time.
Meridian has offered no evidence to the contrary. Its assertion that casing pipe and chemicals were stored "in the same warehouse bay" appears to be based on speculation or a misunderstanding of the warehouse layout, rather than on any actual investigation of the facts. If Meridian conducted a site inspection or reviewed the Warehouse Layout Plan before issuing its denial, there is no indication of such review in its denial letter.
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 in the Safety Data Sheets ("SDS") provided by Cantera Chemical Supply Co. (enclosed herewith as Enclosure 6) — were classified as Class IIIB combustible liquids, with flash points exceeding 200°F. Cantera Chemical Supply Co.'s written shipper instructions required "segregation from incompatible materials per SDS" — a requirement that SLG fully satisfied through the warehouse layout described above.
OSHA's regulation at 29 C.F.R. § 1910.106 governs the storage and handling of "flammable and combustible liquids" and imposes specific and detailed segregation requirements for flammable liquids (Class I) and higher-hazard combustible liquids (Class II and Class IIIA). However, Class IIIB combustible liquids — those with flash points at or above 200°F — are subject to materially less restrictive treatment under the regulation. The stringent segregation requirements that Meridian cited in its denial letter — including minimum separation distances and the requirement for dedicated storage rooms or cabinets — simply do not apply to Class IIIB combustible liquids.
Moreover, the completion chemicals were stored in their original sealed packaging, on pallets, in accordance with the manufacturer's and shipper's instructions. There was no requirement under 29 C.F.R. § 1910.106 or any other applicable standard to isolate these materials from pipe, tools, or other non-incompatible commodities stored in the same warehouse.
SLG complied with the shipper's written storage instructions and all applicable industry standards in all material respects. There is no factual or regulatory basis for Meridian's assertion to the contrary.
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 Warehouse Layout Plan and shipper instructions; and (b) the OSHA regulation cited by Meridian does not impose the segregation requirements that Meridian alleges were violated.
Exclusion 4(f) is inapplicable to this loss as a matter of both fact and law, and Meridian's reliance on this exclusion as a basis for denial is without merit.
B. Exclusion 4(k) — Failure to Maintain — Does Not Apply
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 Inspection, Testing, and Maintenance of Water-Based Fire Protection Systems), the annual re-inspection should have been performed by September 14, 2023. Because no annual full-flow inspection had been completed between September 14, 2022, and the date of the fire on November 17, 2023, Meridian contended that SLG "failed to maintain" the sprinkler system as required, thereby triggering Exclusion 4(k).
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 § 5.2.1, on the following dates:
• December 15, 2022
• March 20, 2023
• June 12, 2023
• September 8, 2023
Records of each of these inspections are enclosed herewith as Enclosure 4. Each quarterly inspection was conducted by qualified SLG maintenance personnel, documented on standardized inspection forms, and retained in SLG's records. No deficiencies requiring corrective action were identified during any of these quarterly inspections.
The most recent annual full-flow test, as required by NFPA 25 § 5.3.2, was performed on September 14, 2022, by Lone Star Fire Protection Inc., a licensed fire protection contractor. The system passed the full-flow test with satisfactory results at that time.
SLG was fully aware of the approaching deadline for the next annual full-flow test and took proactive steps to schedule the inspection in advance. By written engagement letter dated August 28, 2023 — more than two weeks before the September 14, 2023 anniversary date — SLG engaged Lone Star Fire Protection Inc. to perform the annual full-flow inspection (enclosed herewith as Enclosure 5). Lone Star Fire Protection Inc. confirmed receipt of the engagement and scheduled the inspection for November 20, 2023.
The delay from the September 14, 2023 anniversary date to the November 20, 2023 scheduled inspection date — a period of approximately two months — was attributable solely to the contractor's scheduling backlog. Lone Star Fire Protection Inc. is a high-demand contractor serving the Permian Basin oilfield services industry, and scheduling delays of this nature are common in the region. The delay was not caused by any neglect, indifference, or cost-cutting on SLG's part. To the contrary, SLG engaged the contractor in advance of the deadline and accepted the earliest available date.
The fire occurred on November 17, 2023 — only three (3) days before the scheduled annual full-flow inspection of November 20, 2023. The proximity of these dates further underscores the fact that SLG was not delinquent in its maintenance obligations; it was actively in the process of fulfilling them when the fire occurred.
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 the loss be "caused by or resulting from" the insured's failure to maintain the fire protection system. This is a causation requirement. It is not a mere compliance-based trigger. The exclusion does not apply simply because a maintenance task was overdue; the exclusion applies only if the alleged maintenance failure caused or contributed to the loss.
Under Texas law, it is well established that an insurer invoking a policy exclusion bears the burden of proving that the exclusion applies. Drayton Insurance. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991) ("To avoid liability under a policy exclusion, an insurer has the burden to plead and prove the applicability of the exclusion."). This burden includes proving not only that the factual predicate for the exclusion is satisfied, but also that the causal nexus required by the exclusion's language exists.
Meridian cannot carry this burden. The Ridgeline forensic report unequivocally established the following:
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 suppression.
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 municipal water supply. Whether or not the annual full-flow test had been performed before the fire would have had no bearing on the sprinkler system's performance during this fire event, because the system's suppression capability was constrained by the inadequate external water pressure, not by any internal system deficiency.
In short, there is no causal relationship between the delay in the annual full-flow inspection and the loss that occurred. The sprinkler system's inability to suppress the fire was caused by an external water-supply pressure deficit, not by any condition that an annual full-flow test would have identified, remedied, or prevented. Meridian cannot satisfy the "caused by or resulting from" language of Exclusion 4(k), and the exclusion therefore does not apply.
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's scheduling backlog — not to any neglect, willfulness, or disregard on SLG's part — and the inspection was scheduled to occur only three days after the fire.
Even if the two-month delay in the annual full-flow test could be characterized as a "failure to maintain" — which SLG does not concede — Meridian cannot demonstrate that such delay caused or contributed to the loss in any way. The fire was caused by an electrical arc fault in the distribution panel, and the sprinkler system's inability to suppress the fire was caused by a municipal water-supply pressure deficit, neither of which is related to the timing of the annual full-flow test.
Exclusion 4(k) is inapplicable to this loss, and Meridian's reliance on this exclusion as a basis for denial is without merit.
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 concerns under Texas Insurance Code Chapter 541, Subchapter B, which prohibits certain unfair methods of competition and unfair or deceptive acts or practices in the business of insurance. In particular, Section 541.060 of the Texas Insurance Code identifies specific acts that constitute unfair settlement practices, including but not limited to:
• § 541.060(a)(2)(A): Failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer's liability has become reasonably clear;
• § 541.060(a)(7): Refusing to pay a claim without conducting a reasonable investigation with respect to the claim.
As set forth in detail in this letter, SLG's claim is clearly covered under the all-risk insuring agreement of the Policy, and neither of the exclusions invoked by Meridian has any factual or legal basis. Meridian's liability has become reasonably clear, and its continued refusal to pay constitutes a failure to effectuate a prompt, fair, and equitable settlement in violation of § 541.060(a)(2)(A).
Moreover, Meridian's invocation of Exclusion 4(f) (Improper Storage) raises particular concern. The December 4, 2023 Reservation of Rights letter cited only Exclusion 4(k) (Failure to Maintain) as a potential coverage defense. Exclusion 4(f) was raised for the first time in the January 22, 2024 denial letter — nearly seven weeks later. This strongly suggests that Meridian invoked Exclusion 4(f) without conducting an adequate factual investigation into SLG's storage practices, in direct contravention of § 541.060(a)(7). Had Meridian conducted a reasonable investigation — including a review of the Warehouse Layout Plan, the warehouse management system records, and the shipper instructions and Safety Data Sheets — it would have been apparent that the storage practices at the Midland Facility fully complied with shipper instructions and applicable industry standards. The belated and unsupported assertion of this exclusion as a basis for denial is precisely the type of conduct that Chapter 541 is designed to prevent.
Available remedies under Chapter 541 include actual damages sustained as a result of the unfair or deceptive act or practice, and in the case of knowing violations, the court may award up to three times the amount of actual damages (treble damages). Tex. Ins. Code § 541.152. In addition, a prevailing plaintiff is entitled to recover court costs and reasonable and necessary attorney's fees. Id.
B. Texas Insurance Code Chapter 542 — Prompt Payment of Claims
Texas Insurance Code Chapter 542, Subchapter B (the "Prompt Payment of Claims Act"), establishes mandatory deadlines for the handling and payment of insurance claims, and imposes significant statutory penalties on insurers that fail to comply.
SLG submitted its sworn proof of loss to Meridian on February 1, 2024. Under Texas Insurance Code § 542.056, Meridian was required to accept or reject the claim not later than the fifteenth (15th) business day after the date the insurer received all items, statements, and forms reasonably requested and required under Section 542.055. SLG provided all requested documentation in a timely manner and is not aware of any outstanding requests for additional information from Meridian.
Under Texas Insurance Code § 542.058, if an insurer that is liable for a claim under an insurance policy is not in compliance with the deadlines established by Chapter 542, the insurer is liable to pay the policyholder, in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent per annum as damages, together with reasonable attorney's fees. Tex. Ins. Code § 542.060.
Based on the February 1, 2024 submission date of the sworn proof of loss, and applying the statutory timelines set forth in Chapter 542, the deadline for Meridian to accept or reject the claim and tender payment passed no later than approximately April 29, 2024 (the 61st calendar day after February 1, 2024, calculated in accordance with §§ 542.055–542.058). Statutory penalty interest at the rate of 18% per annum on the net claim amount of $4,530,000.00 began accruing on or about that date.
To put the magnitude of this exposure in perspective, 18% per annum interest on $4,530,000.00 equates to approximately $815,400.00 per year, or approximately $2,233.97 per day. This statutory interest continues to accrue each day that Meridian fails to make payment, and it is in addition to — not a substitute for — the principal claim amount and any other remedies available under Texas law.
As of the date of this letter, penalty interest has already begun to accumulate and will grow substantially with each passing day that payment remains outstanding. We strongly urge Meridian to take this exposure into account in evaluating its coverage position.
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 self-insured retention — within thirty (30) calendar days of the date of this letter, that is, on or before May 12, 2024.
Payment should be made by wire transfer to the trust account of Calderwood & Harkness LLP, with wire instructions to be provided upon Meridian's confirmation of payment.
In addition, SLG expressly reserves all rights and remedies under Texas Insurance Code Chapters 541 and 542, including but not limited to:
• Statutory penalty interest at the rate of 18% per annum under Tex. Ins. Code § 542.060, accruing from the date payment was due and continuing until the date of actual payment;
• Actual damages for unfair settlement practices under Tex. Ins. Code § 541.060;
• Treble damages for knowing violations under Tex. Ins. Code § 541.152;
• Reasonable and necessary attorney's fees and costs incurred in connection with the prosecution of SLG's claim.
If Meridian fails to respond to this demand within the stated period, or if Meridian's response is anything other than an unconditional acceptance of the claim and tender of the full net indemnity amount, SLG will have no alternative but to initiate litigation in the appropriate court in Midland County, Texas, seeking recovery of all amounts owed under the Policy, together with all available contractual and statutory remedies, including but not limited to penalty interest, treble damages, attorney's fees, and costs of court.
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 claim, including but not limited to breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code and the Texas Deceptive Trade Practices—Consumer Protection Act.
SLG's willingness to resolve this matter through pre-litigation negotiation, and its decision to provide Meridian with an opportunity to reconsider its coverage position and tender payment before the institution of legal proceedings, should not be construed as an acquiescence to Meridian's coverage position, a limitation on SLG's claims, or a waiver of any right or remedy.
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 May 12, 2024 deadline in an effort to resolve SLG's claim without the necessity of litigation. However, we want to be clear that the passage of the deadline without payment will result in the immediate commencement of legal proceedings.
We look forward to your prompt response.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Bellamy Partner
700 Louisiana Street, Suite 4500 Houston, Texas 77002 Telephone: (713) 654-8217 Facsimile: (713) 654-8201
Email: hbellamy@calderwoodharkness.com
cc: (via First Class Mail and Electronic Mail)
Victoria Kessler, Esq. Kessler, Brandt & Howe LLP 1401 McKinney Street, Suite 2800 Houston, TX 77010
Marcus D. Stonefield, Chief Executive Officer Stonefield Logistics Group Inc. (via electronic mail)
Dale Engstrom, Vice President of Risk Management Stonefield Logistics Group Inc. (via electronic mail)
Enclosures:
Enclosure 1: Ridgeline Forensic Consultants LLC — Origin and Cause Investigation Report (March 15, 2024)
Enclosure 2: Whitlock & Associates, Certified Public Accountants, P.C. — Sworn Proof of Loss and Cargo Valuation (February 1, 2024)
Enclosure 3: SLG Warehouse Layout Plan, Revision 7 (June 2023)
Enclosure 4: SLG Quarterly Sprinkler Inspection Records (December 2022 – September 2023)
Enclosure 5: Lone Star Fire Protection Inc. — Engagement Letter (August 28, 2023)
Enclosure 6: Cantera Chemical Supply Co. — Safety Data Sheets and Written Shipper Instructions
Policy Element | Detail
Named Insured | Stonefield Logistics Group Inc.
Policy Number | IML-TX-0039821-2023
Policy Period | April 1, 2023 – March 31, 2024
Insurer | Meridian Surety & Indemnity Company, an Ohio-domiciled stock insurance company; A.M. Best Rating: A (Excellent); Financial Size Category IX
Per-Occurrence Limit | $5,000,000.00
Annual Aggregate Limit | $10,000,000.00
Self-Insured Retention | $250,000.00 per occurrence
Annual Premium | $174,600.00
Placing Broker | Calvert & Strauss Insurance Brokers, Inc. (Jason Muñoz, Account Executive)
Cargo Description | Owner | Verified Value
312 joints of 5-1/2" P-110 casing pipe | Permian Wellhead Services LLC | $1,842,000.00
47 pallets of completion chemicals | Cantera Chemical Supply Co. | $1,126,500.00
18 crates of downhole tools and sensors | Triton Subsurface Technologies Inc. | $987,000.00
Miscellaneous freight (multiple shippers) | Various | $824,500.00
Total Cargo Value | $4,780,000.00

CALDERWOOD & HARKNESS LLP Attorneys at Law

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AND ELECTRONIC MAIL

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts