1012-00003 · Stonefield Logistics Group · Correspondence

pre-suit-statutory-notice.docx DOCUMENT Litigation

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CALDERWOOD & HARKNESS LLP Attorneys at Law

700 Louisiana Street, Suite 4500 Houston, Texas 77002

Telephone: (713) 555-9200 Facsimile: (713) 555-9201 www.calderwoodharkness.com

July 1, 2024

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AND ELECTRONIC MAIL

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

Re: Pre-Suit Notice Pursuant to Texas Insurance Code § 541.154

Insured: Stonefield Logistics Group Inc.

Policy No.: IML-TX-0039821-2023 (Inland Marine Cargo Legal Liability)

Date of Loss: November 17, 2023

Calderwood & Harkness Matter No.: 1012-00003

Dear Ms. Ng:

I. Purpose and Statutory Basis of Notice

This firm represents Stonefield Logistics Group Inc. ("SLG"), a Texas corporation duly organized and existing under the laws of the State of Texas, with its principal office located at 2900 Petroleum Tower Boulevard, Suite 400, Midland, Texas 79701 (Federal Employer Identification Number: 84-3291057). We write on behalf of SLG in connection with the above-referenced claim under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023 (the "Policy"), issued by Meridian Surety & Indemnity Company ("Meridian").

This letter constitutes the pre-suit notice required by Section 541.154 of the Texas Insurance Code before commencing an action under Chapter 541 of the Texas Insurance Code, which governs Unfair Methods of Competition and Unfair or Deceptive Acts or Practices in the Business of Insurance. Pursuant to that statute, this notice is intended to provide Meridian with a specific description of the acts or practices complained of, the damages sustained by SLG as a result thereof, and the amount of actual damages and expenses incurred, including attorney's fees, so that Meridian may evaluate the claims and, if appropriate, resolve this matter without the necessity of litigation.

SLG intends to file suit against Meridian Surety & Indemnity Company (NAIC No. 28471) in the District Court of Midland County, Texas, if this matter is not fully and finally resolved within sixty (60) days of Meridian's receipt of this letter. SLG's claims are not limited to those arising under Chapter 541. As set forth in greater detail below, SLG's claims also encompass violations of Texas Insurance Code Chapter 542, commonly known as the Texas Prompt Payment of Claims Act, as well as breach of the insurance contract. This notice is intended to satisfy all statutory prerequisites to the filing of suit, and nothing in this letter shall be construed as a waiver or limitation of any right, claim, or remedy available to SLG under law or equity.

II. Background Facts — The Insured and the Policy

SLG is a Texas-based intermodal freight brokerage, trucking, and transload/warehousing company. SLG operates fourteen (14) terminals across Texas, New Mexico, and Oklahoma, specializing in Permian Basin oilfield supply-chain logistics. SLG's operations encompass the receipt, warehousing, transloading, and delivery of a wide range of oilfield materials and equipment, including tubular goods, completion chemicals, drilling consumables, downhole tools, and related freight. SLG employs approximately 340 full-time employees and serves as a critical logistics provider to upstream and midstream operators throughout the Permian Basin.

SLG is a portfolio company of Irongate Capital Partners, LP, a Delaware limited partnership. Irongate acquired a seventy-two percent (72%) equity interest in SLG in August 2019 through Irongate Industrial Partners Fund IV, LP. SLG's management team, including its Chief Executive Officer, Marcus D. Stonefield, retains the remaining equity interest. The significance of SLG's institutional backing is relevant to the magnitude of the economic harm resulting from Meridian's wrongful denial of this claim, as the financial disruption has rippled through SLG's capital structure and operational planning.

Meridian issued to SLG Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023, with a policy period effective from April 1, 2023, through March 31, 2024 (the "Policy"). The Policy provides the following material coverage parameters:

• Per-Occurrence Limit: $5,000,000

• Annual Aggregate Limit: $10,000,000

• Self-Insured Retention ("SIR"): $250,000 per occurrence

The Policy was placed by SLG's insurance broker, Calvert & Strauss Insurance Brokers, Inc., through its account executive, Jason Muñoz. The placement was conducted through a competitive marketing process in which Meridian's terms and pricing were selected based on, among other factors, the breadth of the all-risk coverage grant.

The operative insuring agreement of the Policy provides all-risk coverage for "direct physical loss or damage to cargo in the care, custody, or control of the Insured arising out of or in connection with the Insured's transportation, warehousing, or transloading operations." This language is broad and unambiguous. Under well-settled Texas law, an all-risk policy covers every fortuitous loss not specifically excluded by the policy's terms, and the insurer bears the burden of proving that a specific exclusion applies to bar coverage. See, e.g., Northgate Indemnity Co. v. Hudson Energy Co., 811 S.W.2d 552, 556 (Tex. 1991); Wallis v. United Servs. Auto. Ass'n, 2 S.W.3d 300, 303 (Tex. App.—San Antonio 1999, pet. denied).

III. The Loss Event

On November 17, 2023, at approximately 2:14 a.m. Central Standard Time, a fire broke out in Warehouse Building C (the "Building C Fire") at SLG's Midland Facility, located at 4501 East County Road 130, Midland, Texas 79706 (the "Midland Facility"). The Midland Facility is one of SLG's principal transloading and warehousing hubs, serving as the primary staging area for oilfield materials destined for well sites throughout the central and southern Permian Basin.

The Midland Fire Department was dispatched to the Midland Facility and arrived on scene at approximately 2:31 a.m. Firefighting operations continued for approximately two hours and fourteen minutes. The fire was contained by approximately 4:45 a.m. on November 17, 2023. Building C, a 42,000-square-foot pre-engineered metal warehouse structure, was declared a total structural loss by the Midland Fire Department and subsequently by the structural engineering firm retained by SLG.

SLG promptly retained Ridgeline Forensic Consultants LLC ("Ridgeline") to conduct an independent origin-and-cause investigation. 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 fire origin-and-cause analysis, including extensive experience with industrial warehouse and storage facility fires. Dr. Creech and his team conducted a comprehensive physical examination of the fire scene over a period of six days, collected physical evidence, reviewed photographic and video documentation, analyzed electrical systems, and interviewed SLG personnel and Midland Fire Department investigators.

Ridgeline's final report, dated February 28, 2024 (the "Ridgeline Report"), determined that the fire originated from an electrical fault in the Building C main distribution panel, a Square D Model QED-2 unit that had been installed in 2011 during the original construction of Building C. Specifically, Dr. Creech identified evidence of electrical arcing within the panel's bus bar connections, which ignited adjacent combustible packaging materials that had been stored in proximity to the electrical room in accordance with SLG's standard warehouse layout. The fire spread rapidly through the combustible packaging and into the main warehouse storage bays due to the heat intensity and the combustibility of certain stored materials. Ridgeline's findings were consistent with the preliminary determination reached by the Midland Fire Department's Fire marshal's Office.

The fire destroyed customer cargo valued at a total of $4,780,000, as documented in the sworn proof of loss prepared by Whitlock & Associates, Certified Public Accountants, P.C. (the "Proof of Loss"). The Proof of Loss was prepared under the supervision of Sandra Whitlock, CPA, CFF, the firm's engagement partner, who conducted an independent valuation of the destroyed cargo based on shipper invoices, purchase orders, bills of lading, inventory records, and replacement cost data. The Proof of Loss was executed under oath and submitted to Meridian on February 1, 2024, within the time frame required under the Policy.

The cargo destroyed in the Building C Fire included the following categories:

1. Permian Wellhead Services LLC — Casing Pipe: Three hundred twelve (312) joints of 5-1/2" P-110 casing pipe owned by Permian Wellhead Services LLC, valued at $1,842,000. This casing pipe was stored in Bays 1 through 4 of Building C and was staged for delivery to multiple well sites in Midland and Upton Counties.

2. Cantera Chemical Supply Co. — Completion Chemicals: Forty-seven (47) pallets of completion chemicals owned by Cantera Chemical Supply Co., valued at $1,126,500. These chemicals, which included friction reducers, scale inhibitors, and gel breakers, were classified as Class IIIB combustible liquids (flash point exceeding 200°F) and were stored in Bays 9 through 12 of Building C.

3. Triton Subsurface Technologies Inc. — Downhole Tools and Sensors: Eighteen (18) crates of downhole tools and sensors owned by Triton Subsurface Technologies Inc., valued at $987,000. These items included measurement-while-drilling ("MWD") tools, rotary steerable systems, and associated electronic sensor packages.

4. Miscellaneous Freight (Multiple Shippers): Additional freight belonging to various shippers, valued at $824,500, consisting of pipe fittings, wellhead components, safety equipment, and other oilfield supplies.

After application of the $250,000 per-occurrence self-insured retention under the Policy, the net claim amount is $4,530,000. This amount is well within the $5,000,000 per-occurrence limit and presents no aggregate-limit issues.

IV. Meridian's Claim Handling and Denial

A. Reservation of Rights — December 4, 2023

SLG promptly reported the Building C Fire to Meridian on November 17, 2023, the date of the loss. Meridian acknowledged receipt of the claim and assigned the file to Brian Woolf, Senior Claims Examiner. On December 4, 2023 — seventeen (17) days after the loss — Meridian issued a Reservation of Rights letter (the "ROR Letter") to SLG, acknowledging Meridian's obligation to investigate the claim but purporting to reserve Meridian's right to deny coverage under certain policy provisions.

The ROR Letter cited only one potential exclusion as a basis for denying coverage: Exclusion 4(k) of the Policy, which pertains to loss or damage arising from the insured's "failure to maintain fire protection, fire detection, or fire suppression systems in accordance with applicable codes and standards." Meridian's ROR Letter specifically referenced the sprinkler system in Building C and questioned whether SLG had maintained the system in compliance with NFPA 25, Standard for the Inspection, Testing, and Maintenance of Water-Based Fire Protection Systems.

Notably and significantly, the ROR Letter did not reference Exclusion 4(f) of the Policy, which pertains to "Improper Storage" of cargo. This omission is directly relevant to the unfair claims handling practices complained of herein, as discussed in detail in Section V below.

B. Coverage Denial — January 22, 2024

On January 22, 2024, Meridian issued a formal coverage denial letter (the "Denial Letter"), signed by Brian Woolf, Senior Claims Examiner. The Denial Letter denied coverage for SLG's claim in its entirety, relying on two separate policy exclusions:

1. Exclusion 4(f) — Improper Storage: Meridian alleged that SLG stored casing pipe and completion chemicals in the same warehouse bay in violation of shipper instructions and in violation of the segregation requirements set forth in OSHA regulations at 29 C.F.R. § 1910.106. Meridian contended that this purported improper storage constituted a breach of the Policy's Exclusion 4(f), which excludes loss arising from the insured's storage of cargo "in a manner inconsistent with shipper instructions or applicable safety regulations."

2. Exclusion 4(k) — Failure to Maintain: Meridian alleged that SLG failed to maintain the Building C sprinkler system in compliance with NFPA 25 by failing to complete an annual full-flow inspection. Meridian's Denial Letter stated that SLG's last full-flow inspection of the Building C sprinkler system was conducted on September 14, 2022, and that a re-inspection was due by September 14, 2023, pursuant to the annual inspection cycle required under NFPA 25. Because the fire occurred on November 17, 2023, Meridian asserted that SLG was approximately two months overdue on the annual full-flow inspection at the time of the loss, thereby triggering Exclusion 4(k).

As set forth in detail in Section V of this letter, both of these exclusions are factually and legally inapplicable to SLG's claim, and Meridian's reliance upon them constitutes an unfair and deceptive act or practice under the Texas Insurance Code.

C. Prior Demand and Settlement Efforts

On April 12, 2024, Calderwood & Harkness sent a formal written demand letter to Meridian on behalf of SLG (the "Demand Letter"), demanding payment of the full net claim amount of $4,530,000 under the Policy. A copy of the Demand Letter was simultaneously transmitted to Meridian's coverage counsel, Victoria Kessler of Kessler, Brandt & Howe LLP. The Demand Letter set forth in detail the factual and legal bases for SLG's position that both Exclusion 4(f) and Exclusion 4(k) are inapplicable to the claim and that Meridian's denial was without reasonable basis.

On May 6, 2024, Meridian responded to the Demand Letter by offering a payment of only $1,750,000 as a purported "compromise" settlement of SLG's claim. This offer represented less than thirty-nine percent (39%) of the net claim amount. Meridian's correspondence did not identify any good-faith basis for the reduction. Meridian did not identify any category of claimed cargo that it disputed, did not challenge the valuation methodology employed in the Proof of Loss, and did not articulate any partial applicability of the cited exclusions that would justify payment of only a fraction of the claimed amount. The offer appeared to be an arbitrary number designed to extract a discount from SLG rather than a legitimate attempt to resolve a bona fide coverage dispute.

In an effort to resolve this matter short of litigation, the parties agreed to participate in a mediation. A mediation session was conducted on June 20, 2024, at JAMS Houston before the Honorable Margaret Colquitt (Retired), a former Justice of the First Court of Appeals of Texas and an experienced insurance-coverage mediator (JAMS Case No. 1440-02917-2024). The mediation session lasted approximately nine hours. Despite the mediator's sustained efforts, the mediation concluded in impasse. Meridian refused to increase its offer to a reasonable settlement amount at any point during the session, notwithstanding the mediator's evaluation that SLG's coverage position was well-supported by the facts and applicable law. SLG participated in the mediation in good faith and made meaningful movement toward compromise, but Meridian's intransigence made resolution impossible.

V. Specific Unfair or Deceptive Acts or Practices Complained Of

Pursuant to Texas Insurance Code § 541.154, the following is a detailed description of the specific unfair or deceptive acts or practices of which SLG complains. These acts and practices constitute violations of Chapter 541 of the Texas Insurance Code, including but not limited to the provisions cited below.

A. Wrongful Denial of a Valid Claim — Tex. Ins. Code § 541.060(a)(2)(A)

Section 541.060(a)(2)(A) of the Texas Insurance Code prohibits an insurer from engaging in an unfair settlement practice by "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." Meridian denied SLG's claim in its entirety despite the clear applicability of the Policy's all-risk coverage grant and the plain inapplicability of both exclusions upon which Meridian relied. The specific deficiencies in Meridian's coverage defenses are as follows:

Exclusion 4(f) — Improper Storage — Is Inapplicable. Meridian's reliance on Exclusion 4(f) is factually baseless and legally unsupportable. SLG's Warehouse Layout Plan, Revision 7, dated June 2023 (the "Layout Plan"), which was in effect at the time of the Building C Fire, maintained a forty (40)-foot buffer zone between pipe storage areas (Bays 1 through 4) and chemical pallet storage areas (Bays 9 through 12). Downhole tools, equipment, and other non-incompatible freight were stored in the intervening Bays 5 through 8, providing a substantial physical separation between the pipe storage and chemical storage areas. Post-fire forensic mapping conducted by Ridgeline as part of its origin-and-cause investigation confirmed that this separation was maintained at the time of the fire. The Ridgeline Report includes detailed site mapping, photographic evidence of bay delineations, and witness statements from SLG warehouse personnel confirming adherence to the Layout Plan.

Furthermore, and critically, Meridian's assertion that OSHA 29 C.F.R. § 1910.106 segregation requirements required separation of casing pipe from the Cantera chemicals is factually and legally incorrect. The chemicals stored in Building C — specifically, friction reducers, scale inhibitors, and gel breakers supplied by Cantera Chemical Supply Co. — are classified as Class IIIB combustible liquids, meaning they have flash points at or above 200°F. OSHA 29 C.F.R. § 1910.106 governs the handling, storage, and use of flammable and combustible liquids, but the specific segregation requirements cited by Meridian in its Denial Letter apply to Class I, Class II, and Class IIIA liquids — not to Class IIIB liquids. See 29 C.F.R. § 1910.106(d)(5); see also NFPA 30, Flammable and Combustible Liquids Code, § 9.7.2 (distinguishing storage requirements by liquid classification). Meridian either failed to ascertain the correct classification of the chemicals at issue or disregarded the classification in order to invoke an inapplicable exclusion. Either scenario constitutes an unfair claims handling practice.

Exclusion 4(k) — Failure to Maintain — Is Inapplicable. Meridian's reliance on Exclusion 4(k) is equally without merit. The record demonstrates that SLG completed all quarterly visual inspections of the Building C sprinkler system as required by NFPA 25, Section 5.2.1, on the following dates:

• December 15, 2022

• March 20, 2023

• June 12, 2023

• September 8, 2023

Documentation of each quarterly inspection, including signed inspection reports and photographic records, was maintained by SLG and has been provided to Meridian during the claims process. With respect to the annual full-flow test required under NFPA 25, Section 5.3.2, SLG had engaged its sprinkler maintenance contractor, Lone Star Fire Protection Inc., to perform the annual full-flow test. An engagement letter dated August 28, 2023, confirms that the annual full-flow test was scheduled for November 20, 2023 — just three (3) days after the fire. The delay from the September 14, 2023, anniversary of the prior annual test was attributable to a scheduling backlog experienced by Lone Star Fire Protection Inc., which was serving multiple clients in the Permian Basin region during the same period. SLG acted diligently and in good faith in scheduling the inspection within a reasonable time frame.

Moreover, even assuming arguendo that the annual full-flow test was overdue, the Ridgeline Report conclusively establishes that the condition of the sprinkler system was not a contributing cause of the loss. The fire originated in the electrical distribution panel, not in a storage area, and spread through combustible packaging materials before reaching the main warehouse bays. The Ridgeline Report further concluded that even a fully code-compliant sprinkler system would not have prevented the loss given the documented municipal water-supply pressure deficit at the Midland Facility. Specifically, the actual water-supply pressure at the facility connection was measured at 36 psi, whereas the designed sprinkler system required a minimum supply pressure of 52 psi to achieve the required flow density over the design area. This pressure deficit — which is attributable to the municipal water system and not to any act or omission of SLG — would have rendered the sprinkler system incapable of controlling or suppressing the fire regardless of its inspection status.

Under Texas law, as set forth in Northgate Indemnity Co. v. Hudson Energy Co., 811 S.W.2d 552 (Tex. 1991), Meridian, as the insurer invoking a policy exclusion under an all-risk policy, bears the burden of proving that the exclusion applies, including demonstrating the requisite causal nexus between the excluded condition and the loss. Meridian cannot satisfy this burden. The undisputed forensic evidence establishes that neither the storage configuration nor the sprinkler inspection status was a contributing cause of the Building C Fire or the resulting cargo loss. Accordingly, Meridian's denial of SLG's claim under either Exclusion 4(f) or Exclusion 4(k) was wrongful and constitutes an unfair or deceptive act or practice in violation of Section 541.060(a)(2)(A) of the Texas Insurance Code.

B. Failure to Attempt in Good Faith to Effectuate a Prompt, Fair, and Equitable Settlement — Tex. Ins. Code § 541.060(a)(2)(A)

Independent of the wrongful denial itself, Meridian's conduct during the settlement process constitutes a separate and additional violation of Section 541.060(a)(2)(A). Meridian's liability to SLG under the Policy was reasonably clear at all times following the submission of the sworn Proof of Loss on February 1, 2024, and became even more manifest after SLG delivered the complete Ridgeline Report to Meridian on March 15, 2024. The Ridgeline Report definitively established both the origin and cause of the fire and the inapplicability of the exclusions upon which Meridian relied.

Despite the manifest weakness of its coverage defenses, Meridian offered only $1,750,000 as a purported compromise payment — an amount representing less than thirty-nine percent (39%) of the net claim. Meridian provided no factual or legal justification for the dramatic reduction from the documented claim amount. The offer was not accompanied by any alternative valuation of the destroyed cargo, any challenge to the Proof of Loss, or any articulation of a partial-coverage theory that would explain the differential between the claim amount and the offer. Under these circumstances, the $1,750,000 offer cannot be characterized as a good-faith attempt to effectuate a fair and equitable settlement but rather constitutes an unfair settlement practice designed to coerce SLG into accepting a grossly inadequate payment.

Meridian's refusal to increase its offer at the June 20, 2024 mediation before the Honorable Margaret Colquitt (Ret.) — despite an extended, nine-hour session and the mediator's assessment — further demonstrates Meridian's bad faith. SLG negotiated in good faith throughout the mediation process, making meaningful concessions, while Meridian remained intransigent. The resulting impasse was solely attributable to Meridian's conduct.

C. Raising a New Exclusion Without Adequate Investigation — Tex. Ins. Code § 541.060(a)(7)

Section 541.060(a)(7) of the Texas Insurance Code prohibits an insurer from "refusing to pay a claim without conducting a reasonable investigation with respect to the claim." Meridian's conduct in invoking Exclusion 4(f) violates this provision.

Meridian's December 4, 2023 Reservation of Rights Letter cited only Exclusion 4(k) (Failure to Maintain) as a potential basis for denying coverage. Exclusion 4(f) (Improper Storage) was not mentioned, referenced, or alluded to in the ROR Letter. Exclusion 4(f) was raised for the first time in the January 22, 2024 Denial Letter — seven weeks after the ROR Letter — without any indication that Meridian conducted an adequate or reasonable investigation of the actual warehouse layout, the shipper instructions applicable to the destroyed cargo, or the applicable regulatory requirements prior to invoking that exclusion.

Specifically, there is no indication that Meridian's claims personnel or any investigator retained by Meridian: (a) reviewed SLG's Warehouse Layout Plan; (b) inspected or mapped the actual bay assignments in Building C; (c) obtained or reviewed the shipper instructions issued by Cantera Chemical Supply Co. or any other shipper; (d) ascertained the correct OSHA classification of the chemicals stored in Building C; or (e) analyzed the applicability of 29 C.F.R. § 1910.106 to Class IIIB combustible liquids. The assertion that OSHA 29 C.F.R. § 1910.106 segregation requirements apply to Class IIIB combustible liquids is factually and legally incorrect, as discussed above, and strongly suggests that Meridian invoked Exclusion 4(f) without a reasonable basis and without conducting a reasonable investigation. Such conduct constitutes an unfair claims handling practice under Section 541.060(a)(7) and reflects a pattern of post-hoc rationalization rather than legitimate claims evaluation.

VI. Actual Damages

Pursuant to Texas Insurance Code § 541.154, the following is a statement of the specific amount of actual damages and expenses, including attorney's fees, reasonably incurred by SLG as a result of Meridian's unfair or deceptive acts or practices. SLG's actual damages include, but are not limited to, the following:

1. Net Indemnity Owed Under the Policy: $4,530,000, representing the total documented cargo loss of $4,780,000, less the $250,000 per-occurrence self-insured retention under Policy No. IML-TX-0039821-2023. This amount is supported by the sworn Proof of Loss prepared by Whitlock & Associates, Certified Public Accountants, P.C., and submitted to Meridian on February 1, 2024.

2. Consequential Damages: SLG has sustained consequential damages arising from Meridian's wrongful denial, including but not limited to: (a) loss of use of funds that should have been paid under the Policy; (b) business disruption costs incurred as a result of the inability to promptly replace destroyed cargo and resume normal operations at the Midland Facility; (c) increased insurance costs and related expenses; and (d) costs incurred by SLG in pursuing the claim, including the costs of the Ridgeline forensic investigation, the Whitlock & Associates engagement, and the JAMS mediation. The specific amount of consequential damages continues to accrue and will be quantified in connection with any litigation.

3. Attorney's Fees and Costs of Suit: SLG has incurred, and will continue to incur, reasonable and necessary attorney's fees and litigation costs in connection with this matter. These amounts will be documented and proven at trial or other appropriate proceeding.

The specific amount of actual damages as of the date of this letter attributable to policy benefits wrongfully withheld by Meridian is $4,530,000. Additional consequential damages, attorney's fees, and costs continue to accrue.

VII. Additional Statutory Remedies

In addition to actual damages, SLG is entitled to the following additional statutory remedies:

A. Treble Damages — Tex. Ins. Code § 541.152

Texas Insurance Code § 541.152(b) provides that a plaintiff who prevails on a claim under Chapter 541 is entitled to recover up to three (3) times the amount of actual damages upon a finding that the defendant's acts were committed "knowingly." SLG contends that Meridian's unfair and deceptive acts or practices, as described herein, were committed knowingly. Meridian was in possession of all material facts — including the Ridgeline Report, the Proof of Loss, the warehouse layout documentation, and the OSHA regulatory framework — and nonetheless persisted in denying SLG's valid claim and refusing to offer a reasonable settlement. Accordingly, SLG is entitled to recover treble damages in the amount of up to $13,590,000 (three times the $4,530,000 in policy benefits wrongfully withheld), in addition to any treble-damage recovery based on consequential damages.

B. Attorney's Fees — Tex. Ins. Code § 541.152(a)(1)

Texas Insurance Code § 541.152(a)(1) provides that a plaintiff who prevails under Chapter 541 is entitled to recover "court costs and reasonable and necessary attorney's fees." SLG intends to seek recovery of all attorney's fees incurred and to be incurred in the prosecution of this matter, through trial and any subsequent appeals.

C. Prompt Payment Penalties — Tex. Ins. Code Chapter 542

Meridian has also violated the Texas Prompt Payment of Claims Act, codified at Chapter 542 of the Texas Insurance Code (Subchapter B, §§ 542.051–542.061). The Prompt Payment Act imposes statutory deadlines on insurers for acknowledging, investigating, and paying claims, and provides enhanced penalties — including statutory interest at the rate of eighteen percent (18%) per annum — for untimely payment.

SLG submitted its sworn Proof of Loss to Meridian on February 1, 2024. Under Chapter 542, Meridian was required to accept or deny the claim within the time periods specified by the statute. Accounting for the applicable statutory deadlines, the sixty-first (61st) business day after Meridian's receipt of all items, statements, and forms reasonably requested and required under the Policy falls on or about April 29, 2024. Meridian denied SLG's claim on January 22, 2024, well within the statutory period; however, the denial was wrongful for the reasons set forth herein. Under established Texas law, a wrongful denial does not toll or satisfy the insurer's obligation to make timely payment. See Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995).

Under Texas Insurance Code § 542.060, SLG is entitled to recover the amount of the claim plus interest on the amount of the claim at the rate of eighteen percent (18%) per annum, calculated from the date on which payment was due. As of the date of this letter, July 1, 2024, the estimated penalty interest on $4,530,000 at eighteen percent (18%) per annum is continuing to accrue. Through an estimated resolution date in August 2024, accrued penalty interest is approximately $250,128. These penalties continue to accrue on a daily basis until Meridian makes full payment of the amounts owed under the Policy.

SLG expressly reserves its right to recover all penalty interest accruing under Chapter 542, calculated through the date of actual payment, as well as reasonable attorney's fees recoverable under Section 542.060.

VIII. Demand and Notice of Intent to Sue

Based on the foregoing, SLG hereby demands that Meridian pay the following amounts within sixty (60) days of Meridian's receipt of this letter:

1. The full net claim amount of $4,530,000 under Policy No. IML-TX-0039821-2023;

2. Accrued statutory penalty interest under Texas Insurance Code § 542.060 at the rate of eighteen percent (18%) per annum, calculated from April 29, 2024 through the date of actual payment; and

3. Reasonable and necessary attorney's fees and costs incurred by SLG in connection with this matter through the date of resolution.

If this matter is not fully and finally resolved within the sixty (60)-day period prescribed by Texas Insurance Code § 541.154, SLG intends to file suit against Meridian Surety & Indemnity Company in the District Court of Midland County, Texas, asserting the following claims:

• Breach of the Insurance Contract, for Meridian's wrongful denial of SLG's valid claim under Policy No. IML-TX-0039821-2023;

• Violations of Texas Insurance Code Chapter 541, including unfair settlement practices and unfair or deceptive acts or practices, with claims for actual damages, treble damages under § 541.152(b), and attorney's fees under § 541.152(a)(1); and

• Violations of Texas Insurance Code Chapter 542, including failure to comply with the Prompt Payment of Claims Act, with claims for eighteen percent (18%) per annum penalty interest under § 542.060 and attorney's fees.

SLG expressly reserves all rights, claims, and remedies available at law or in equity, including but not limited to claims for breach of the duty of good faith and fair dealing, common-law bad faith, and any other claims that may arise from Meridian's conduct. No right, claim, or remedy is waived by the transmission of this notice, by any prior communication or negotiation, or by SLG's participation in the June 20, 2024 mediation.

IX. Direction to Communicate Through Counsel

SLG is represented by this firm in connection with all matters relating to the above-referenced claim, the Policy, and any disputes arising therefrom. All communications regarding this matter — whether written, electronic, or oral — should be directed exclusively to the undersigned at:

Calderwood & Harkness LLP 700 Louisiana Street, Suite 4500 Houston, Texas 77002 Telephone: (713) 555-9200 Facsimile: (713) 555-9201

Email: hbellamy@calderwoodharkness.com

Reference: C&H Matter No. 1012-00003

Please do not contact SLG or any of its officers, directors, employees, or representatives directly regarding this matter. Any such communications should be directed through this office.

We trust that Meridian will give this matter the prompt and serious attention it warrants. SLG remains willing to engage in good-faith negotiations to resolve this dispute, but will not hesitate to pursue its full legal remedies if Meridian fails to make prompt and adequate payment within the time specified.

Sincerely,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Bellamy Partner

700 Louisiana Street, Suite 4500 Houston, Texas 77002 Telephone: (713) 555-9200

Email: hbellamy@calderwoodharkness.com

cc: (via email and first-class mail)

Marcus D. Stonefield, Chief Executive Officer Stonefield Logistics Group Inc. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701

Dale Engstrom, Vice President of Risk Management Stonefield Logistics Group Inc. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701

Victoria Kessler, Esq. Kessler, Brandt & Howe LLP 1401 McKinney Street, Suite 2800 Houston, TX 77010 (Coverage Counsel for Meridian Surety & Indemnity Company)

Enclosures: None. The prior demand letter dated April 12, 2024, the Ridgeline Forensic Consultants LLC report dated February 28, 2024, the sworn Proof of Loss dated February 1, 2024, and the JAMS mediation materials were previously furnished to Meridian and its counsel.

CALDERWOOD & HARKNESS LLP Attorneys at Law
700 Louisiana Street, Suite 4500 Houston, Texas 77002
Telephone: (713) 555-9200 Facsimile: (713) 555-9201 www.calderwoodharkness.com
July 1, 2024
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AND ELECTRONIC MAIL
Patricia Ng, Vice President of Claims Meridian Surety & Indemnity Company 600 Scioto Crossing, Suite 1200 Columbus, OH 43215
Re: Pre-Suit Notice Pursuant to Texas Insurance Code § 541.154
Insured: Stonefield Logistics Group Inc.
Policy No.: IML-TX-0039821-2023 (Inland Marine Cargo Legal Liability)
Date of Loss: November 17, 2023
Calderwood & Harkness Matter No.: 1012-00003
Dear Ms. Ng:
I. Purpose and Statutory Basis of Notice
This firm represents Stonefield Logistics Group Inc. ("SLG"), a Texas corporation duly organized and existing under the laws of the State of Texas, with its principal office located at 2900 Petroleum Tower Boulevard, Suite 400, Midland, Texas 79701 (Federal Employer Identification Number: 84-3291057). We write on behalf of SLG in connection with the above-referenced claim under Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023 (the "Policy"), issued by Meridian Surety & Indemnity Company ("Meridian").
This letter constitutes the pre-suit notice required by Section 541.154 of the Texas Insurance Code before commencing an action under Chapter 541 of the Texas Insurance Code, which governs Unfair Methods of Competition and Unfair or Deceptive Acts or Practices in the Business of Insurance. Pursuant to that statute, this notice is intended to provide Meridian with a specific description of the acts or practices complained of, the damages sustained by SLG as a result thereof, and the amount of actual damages and expenses incurred, including attorney's fees, so that Meridian may evaluate the claims and, if appropriate, resolve this matter without the necessity of litigation.
SLG intends to file suit against Meridian Surety & Indemnity Company (NAIC No. 28471) in the District Court of Midland County, Texas, if this matter is not fully and finally resolved within sixty (60) days of Meridian's receipt of this letter. SLG's claims are not limited to those arising under Chapter 541. As set forth in greater detail below, SLG's claims also encompass violations of Texas Insurance Code Chapter 542, commonly known as the Texas Prompt Payment of Claims Act, as well as breach of the insurance contract. This notice is intended to satisfy all statutory prerequisites to the filing of suit, and nothing in this letter shall be construed as a waiver or limitation of any right, claim, or remedy available to SLG under law or equity.
II. Background Facts — The Insured and the Policy
SLG is a Texas-based intermodal freight brokerage, trucking, and transload/warehousing company. SLG operates fourteen (14) terminals across Texas, New Mexico, and Oklahoma, specializing in Permian Basin oilfield supply-chain logistics. SLG's operations encompass the receipt, warehousing, transloading, and delivery of a wide range of oilfield materials and equipment, including tubular goods, completion chemicals, drilling consumables, downhole tools, and related freight. SLG employs approximately 340 full-time employees and serves as a critical logistics provider to upstream and midstream operators throughout the Permian Basin.
SLG is a portfolio company of Irongate Capital Partners, LP, a Delaware limited partnership. Irongate acquired a seventy-two percent (72%) equity interest in SLG in August 2019 through Irongate Industrial Partners Fund IV, LP. SLG's management team, including its Chief Executive Officer, Marcus D. Stonefield, retains the remaining equity interest. The significance of SLG's institutional backing is relevant to the magnitude of the economic harm resulting from Meridian's wrongful denial of this claim, as the financial disruption has rippled through SLG's capital structure and operational planning.
Meridian issued to SLG Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023, with a policy period effective from April 1, 2023, through March 31, 2024 (the "Policy"). The Policy provides the following material coverage parameters:
• Per-Occurrence Limit: $5,000,000
• Annual Aggregate Limit: $10,000,000
• Self-Insured Retention ("SIR"): $250,000 per occurrence
The Policy was placed by SLG's insurance broker, Calvert & Strauss Insurance Brokers, Inc., through its account executive, Jason Muñoz. The placement was conducted through a competitive marketing process in which Meridian's terms and pricing were selected based on, among other factors, the breadth of the all-risk coverage grant.
The operative insuring agreement of the Policy provides all-risk coverage for "direct physical loss or damage to cargo in the care, custody, or control of the Insured arising out of or in connection with the Insured's transportation, warehousing, or transloading operations." This language is broad and unambiguous. Under well-settled Texas law, an all-risk policy covers every fortuitous loss not specifically excluded by the policy's terms, and the insurer bears the burden of proving that a specific exclusion applies to bar coverage. See, e.g., Northgate Indemnity Co. v. Hudson Energy Co., 811 S.W.2d 552, 556 (Tex. 1991); Wallis v. United Servs. Auto. Ass'n, 2 S.W.3d 300, 303 (Tex. App.—San Antonio 1999, pet. denied).
III. The Loss Event
On November 17, 2023, at approximately 2:14 a.m. Central Standard Time, a fire broke out in Warehouse Building C (the "Building C Fire") at SLG's Midland Facility, located at 4501 East County Road 130, Midland, Texas 79706 (the "Midland Facility"). The Midland Facility is one of SLG's principal transloading and warehousing hubs, serving as the primary staging area for oilfield materials destined for well sites throughout the central and southern Permian Basin.
The Midland Fire Department was dispatched to the Midland Facility and arrived on scene at approximately 2:31 a.m. Firefighting operations continued for approximately two hours and fourteen minutes. The fire was contained by approximately 4:45 a.m. on November 17, 2023. Building C, a 42,000-square-foot pre-engineered metal warehouse structure, was declared a total structural loss by the Midland Fire Department and subsequently by the structural engineering firm retained by SLG.
SLG promptly retained Ridgeline Forensic Consultants LLC ("Ridgeline") to conduct an independent origin-and-cause investigation. 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 fire origin-and-cause analysis, including extensive experience with industrial warehouse and storage facility fires. Dr. Creech and his team conducted a comprehensive physical examination of the fire scene over a period of six days, collected physical evidence, reviewed photographic and video documentation, analyzed electrical systems, and interviewed SLG personnel and Midland Fire Department investigators.
Ridgeline's final report, dated February 28, 2024 (the "Ridgeline Report"), determined that the fire originated from an electrical fault in the Building C main distribution panel, a Square D Model QED-2 unit that had been installed in 2011 during the original construction of Building C. Specifically, Dr. Creech identified evidence of electrical arcing within the panel's bus bar connections, which ignited adjacent combustible packaging materials that had been stored in proximity to the electrical room in accordance with SLG's standard warehouse layout. The fire spread rapidly through the combustible packaging and into the main warehouse storage bays due to the heat intensity and the combustibility of certain stored materials. Ridgeline's findings were consistent with the preliminary determination reached by the Midland Fire Department's Fire marshal's Office.
The fire destroyed customer cargo valued at a total of $4,780,000, as documented in the sworn proof of loss prepared by Whitlock & Associates, Certified Public Accountants, P.C. (the "Proof of Loss"). The Proof of Loss was prepared under the supervision of Sandra Whitlock, CPA, CFF, the firm's engagement partner, who conducted an independent valuation of the destroyed cargo based on shipper invoices, purchase orders, bills of lading, inventory records, and replacement cost data. The Proof of Loss was executed under oath and submitted to Meridian on February 1, 2024, within the time frame required under the Policy.
The cargo destroyed in the Building C Fire included the following categories:
1. Permian Wellhead Services LLC — Casing Pipe: Three hundred twelve (312) joints of 5-1/2" P-110 casing pipe owned by Permian Wellhead Services LLC, valued at $1,842,000. This casing pipe was stored in Bays 1 through 4 of Building C and was staged for delivery to multiple well sites in Midland and Upton Counties.
2. Cantera Chemical Supply Co. — Completion Chemicals: Forty-seven (47) pallets of completion chemicals owned by Cantera Chemical Supply Co., valued at $1,126,500. These chemicals, which included friction reducers, scale inhibitors, and gel breakers, were classified as Class IIIB combustible liquids (flash point exceeding 200°F) and were stored in Bays 9 through 12 of Building C.
3. Triton Subsurface Technologies Inc. — Downhole Tools and Sensors: Eighteen (18) crates of downhole tools and sensors owned by Triton Subsurface Technologies Inc., valued at $987,000. These items included measurement-while-drilling ("MWD") tools, rotary steerable systems, and associated electronic sensor packages.
4. Miscellaneous Freight (Multiple Shippers): Additional freight belonging to various shippers, valued at $824,500, consisting of pipe fittings, wellhead components, safety equipment, and other oilfield supplies.
After application of the $250,000 per-occurrence self-insured retention under the Policy, the net claim amount is $4,530,000. This amount is well within the $5,000,000 per-occurrence limit and presents no aggregate-limit issues.
IV. Meridian's Claim Handling and Denial
A. Reservation of Rights — December 4, 2023
SLG promptly reported the Building C Fire to Meridian on November 17, 2023, the date of the loss. Meridian acknowledged receipt of the claim and assigned the file to Brian Woolf, Senior Claims Examiner. On December 4, 2023 — seventeen (17) days after the loss — Meridian issued a Reservation of Rights letter (the "ROR Letter") to SLG, acknowledging Meridian's obligation to investigate the claim but purporting to reserve Meridian's right to deny coverage under certain policy provisions.
The ROR Letter cited only one potential exclusion as a basis for denying coverage: Exclusion 4(k) of the Policy, which pertains to loss or damage arising from the insured's "failure to maintain fire protection, fire detection, or fire suppression systems in accordance with applicable codes and standards." Meridian's ROR Letter specifically referenced the sprinkler system in Building C and questioned whether SLG had maintained the system in compliance with NFPA 25, Standard for the Inspection, Testing, and Maintenance of Water-Based Fire Protection Systems.
Notably and significantly, the ROR Letter did not reference Exclusion 4(f) of the Policy, which pertains to "Improper Storage" of cargo. This omission is directly relevant to the unfair claims handling practices complained of herein, as discussed in detail in Section V below.
B. Coverage Denial — January 22, 2024
On January 22, 2024, Meridian issued a formal coverage denial letter (the "Denial Letter"), signed by Brian Woolf, Senior Claims Examiner. The Denial Letter denied coverage for SLG's claim in its entirety, relying on two separate policy exclusions:
1. Exclusion 4(f) — Improper Storage: Meridian alleged that SLG stored casing pipe and completion chemicals in the same warehouse bay in violation of shipper instructions and in violation of the segregation requirements set forth in OSHA regulations at 29 C.F.R. § 1910.106. Meridian contended that this purported improper storage constituted a breach of the Policy's Exclusion 4(f), which excludes loss arising from the insured's storage of cargo "in a manner inconsistent with shipper instructions or applicable safety regulations."
2. Exclusion 4(k) — Failure to Maintain: Meridian alleged that SLG failed to maintain the Building C sprinkler system in compliance with NFPA 25 by failing to complete an annual full-flow inspection. Meridian's Denial Letter stated that SLG's last full-flow inspection of the Building C sprinkler system was conducted on September 14, 2022, and that a re-inspection was due by September 14, 2023, pursuant to the annual inspection cycle required under NFPA 25. Because the fire occurred on November 17, 2023, Meridian asserted that SLG was approximately two months overdue on the annual full-flow inspection at the time of the loss, thereby triggering Exclusion 4(k).
As set forth in detail in Section V of this letter, both of these exclusions are factually and legally inapplicable to SLG's claim, and Meridian's reliance upon them constitutes an unfair and deceptive act or practice under the Texas Insurance Code.
C. Prior Demand and Settlement Efforts
On April 12, 2024, Calderwood & Harkness sent a formal written demand letter to Meridian on behalf of SLG (the "Demand Letter"), demanding payment of the full net claim amount of $4,530,000 under the Policy. A copy of the Demand Letter was simultaneously transmitted to Meridian's coverage counsel, Victoria Kessler of Kessler, Brandt & Howe LLP. The Demand Letter set forth in detail the factual and legal bases for SLG's position that both Exclusion 4(f) and Exclusion 4(k) are inapplicable to the claim and that Meridian's denial was without reasonable basis.
On May 6, 2024, Meridian responded to the Demand Letter by offering a payment of only $1,750,000 as a purported "compromise" settlement of SLG's claim. This offer represented less than thirty-nine percent (39%) of the net claim amount. Meridian's correspondence did not identify any good-faith basis for the reduction. Meridian did not identify any category of claimed cargo that it disputed, did not challenge the valuation methodology employed in the Proof of Loss, and did not articulate any partial applicability of the cited exclusions that would justify payment of only a fraction of the claimed amount. The offer appeared to be an arbitrary number designed to extract a discount from SLG rather than a legitimate attempt to resolve a bona fide coverage dispute.
In an effort to resolve this matter short of litigation, the parties agreed to participate in a mediation. A mediation session was conducted on June 20, 2024, at JAMS Houston before the Honorable Margaret Colquitt (Retired), a former Justice of the First Court of Appeals of Texas and an experienced insurance-coverage mediator (JAMS Case No. 1440-02917-2024). The mediation session lasted approximately nine hours. Despite the mediator's sustained efforts, the mediation concluded in impasse. Meridian refused to increase its offer to a reasonable settlement amount at any point during the session, notwithstanding the mediator's evaluation that SLG's coverage position was well-supported by the facts and applicable law. SLG participated in the mediation in good faith and made meaningful movement toward compromise, but Meridian's intransigence made resolution impossible.
V. Specific Unfair or Deceptive Acts or Practices Complained Of
Pursuant to Texas Insurance Code § 541.154, the following is a detailed description of the specific unfair or deceptive acts or practices of which SLG complains. These acts and practices constitute violations of Chapter 541 of the Texas Insurance Code, including but not limited to the provisions cited below.
A. Wrongful Denial of a Valid Claim — Tex. Ins. Code § 541.060(a)(2)(A)
Section 541.060(a)(2)(A) of the Texas Insurance Code prohibits an insurer from engaging in an unfair settlement practice by "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." Meridian denied SLG's claim in its entirety despite the clear applicability of the Policy's all-risk coverage grant and the plain inapplicability of both exclusions upon which Meridian relied. The specific deficiencies in Meridian's coverage defenses are as follows:
Exclusion 4(f) — Improper Storage — Is Inapplicable. Meridian's reliance on Exclusion 4(f) is factually baseless and legally unsupportable. SLG's Warehouse Layout Plan, Revision 7, dated June 2023 (the "Layout Plan"), which was in effect at the time of the Building C Fire, maintained a forty (40)-foot buffer zone between pipe storage areas (Bays 1 through 4) and chemical pallet storage areas (Bays 9 through 12). Downhole tools, equipment, and other non-incompatible freight were stored in the intervening Bays 5 through 8, providing a substantial physical separation between the pipe storage and chemical storage areas. Post-fire forensic mapping conducted by Ridgeline as part of its origin-and-cause investigation confirmed that this separation was maintained at the time of the fire. The Ridgeline Report includes detailed site mapping, photographic evidence of bay delineations, and witness statements from SLG warehouse personnel confirming adherence to the Layout Plan.
Furthermore, and critically, Meridian's assertion that OSHA 29 C.F.R. § 1910.106 segregation requirements required separation of casing pipe from the Cantera chemicals is factually and legally incorrect. The chemicals stored in Building C — specifically, friction reducers, scale inhibitors, and gel breakers supplied by Cantera Chemical Supply Co. — are classified as Class IIIB combustible liquids, meaning they have flash points at or above 200°F. OSHA 29 C.F.R. § 1910.106 governs the handling, storage, and use of flammable and combustible liquids, but the specific segregation requirements cited by Meridian in its Denial Letter apply to Class I, Class II, and Class IIIA liquids — not to Class IIIB liquids. See 29 C.F.R. § 1910.106(d)(5); see also NFPA 30, Flammable and Combustible Liquids Code, § 9.7.2 (distinguishing storage requirements by liquid classification). Meridian either failed to ascertain the correct classification of the chemicals at issue or disregarded the classification in order to invoke an inapplicable exclusion. Either scenario constitutes an unfair claims handling practice.
Exclusion 4(k) — Failure to Maintain — Is Inapplicable. Meridian's reliance on Exclusion 4(k) is equally without merit. The record demonstrates that SLG completed all quarterly visual inspections of the Building C sprinkler system as required by NFPA 25, Section 5.2.1, on the following dates:
• December 15, 2022
• March 20, 2023
• June 12, 2023
• September 8, 2023
Documentation of each quarterly inspection, including signed inspection reports and photographic records, was maintained by SLG and has been provided to Meridian during the claims process. With respect to the annual full-flow test required under NFPA 25, Section 5.3.2, SLG had engaged its sprinkler maintenance contractor, Lone Star Fire Protection Inc., to perform the annual full-flow test. An engagement letter dated August 28, 2023, confirms that the annual full-flow test was scheduled for November 20, 2023 — just three (3) days after the fire. The delay from the September 14, 2023, anniversary of the prior annual test was attributable to a scheduling backlog experienced by Lone Star Fire Protection Inc., which was serving multiple clients in the Permian Basin region during the same period. SLG acted diligently and in good faith in scheduling the inspection within a reasonable time frame.
Moreover, even assuming arguendo that the annual full-flow test was overdue, the Ridgeline Report conclusively establishes that the condition of the sprinkler system was not a contributing cause of the loss. The fire originated in the electrical distribution panel, not in a storage area, and spread through combustible packaging materials before reaching the main warehouse bays. The Ridgeline Report further concluded that even a fully code-compliant sprinkler system would not have prevented the loss given the documented municipal water-supply pressure deficit at the Midland Facility. Specifically, the actual water-supply pressure at the facility connection was measured at 36 psi, whereas the designed sprinkler system required a minimum supply pressure of 52 psi to achieve the required flow density over the design area. This pressure deficit — which is attributable to the municipal water system and not to any act or omission of SLG — would have rendered the sprinkler system incapable of controlling or suppressing the fire regardless of its inspection status.
Under Texas law, as set forth in Northgate Indemnity Co. v. Hudson Energy Co., 811 S.W.2d 552 (Tex. 1991), Meridian, as the insurer invoking a policy exclusion under an all-risk policy, bears the burden of proving that the exclusion applies, including demonstrating the requisite causal nexus between the excluded condition and the loss. Meridian cannot satisfy this burden. The undisputed forensic evidence establishes that neither the storage configuration nor the sprinkler inspection status was a contributing cause of the Building C Fire or the resulting cargo loss. Accordingly, Meridian's denial of SLG's claim under either Exclusion 4(f) or Exclusion 4(k) was wrongful and constitutes an unfair or deceptive act or practice in violation of Section 541.060(a)(2)(A) of the Texas Insurance Code.
B. Failure to Attempt in Good Faith to Effectuate a Prompt, Fair, and Equitable Settlement — Tex. Ins. Code § 541.060(a)(2)(A)
Independent of the wrongful denial itself, Meridian's conduct during the settlement process constitutes a separate and additional violation of Section 541.060(a)(2)(A). Meridian's liability to SLG under the Policy was reasonably clear at all times following the submission of the sworn Proof of Loss on February 1, 2024, and became even more manifest after SLG delivered the complete Ridgeline Report to Meridian on March 15, 2024. The Ridgeline Report definitively established both the origin and cause of the fire and the inapplicability of the exclusions upon which Meridian relied.
Despite the manifest weakness of its coverage defenses, Meridian offered only $1,750,000 as a purported compromise payment — an amount representing less than thirty-nine percent (39%) of the net claim. Meridian provided no factual or legal justification for the dramatic reduction from the documented claim amount. The offer was not accompanied by any alternative valuation of the destroyed cargo, any challenge to the Proof of Loss, or any articulation of a partial-coverage theory that would explain the differential between the claim amount and the offer. Under these circumstances, the $1,750,000 offer cannot be characterized as a good-faith attempt to effectuate a fair and equitable settlement but rather constitutes an unfair settlement practice designed to coerce SLG into accepting a grossly inadequate payment.
Meridian's refusal to increase its offer at the June 20, 2024 mediation before the Honorable Margaret Colquitt (Ret.) — despite an extended, nine-hour session and the mediator's assessment — further demonstrates Meridian's bad faith. SLG negotiated in good faith throughout the mediation process, making meaningful concessions, while Meridian remained intransigent. The resulting impasse was solely attributable to Meridian's conduct.
C. Raising a New Exclusion Without Adequate Investigation — Tex. Ins. Code § 541.060(a)(7)
Section 541.060(a)(7) of the Texas Insurance Code prohibits an insurer from "refusing to pay a claim without conducting a reasonable investigation with respect to the claim." Meridian's conduct in invoking Exclusion 4(f) violates this provision.
Meridian's December 4, 2023 Reservation of Rights Letter cited only Exclusion 4(k) (Failure to Maintain) as a potential basis for denying coverage. Exclusion 4(f) (Improper Storage) was not mentioned, referenced, or alluded to in the ROR Letter. Exclusion 4(f) was raised for the first time in the January 22, 2024 Denial Letter — seven weeks after the ROR Letter — without any indication that Meridian conducted an adequate or reasonable investigation of the actual warehouse layout, the shipper instructions applicable to the destroyed cargo, or the applicable regulatory requirements prior to invoking that exclusion.
Specifically, there is no indication that Meridian's claims personnel or any investigator retained by Meridian: (a) reviewed SLG's Warehouse Layout Plan; (b) inspected or mapped the actual bay assignments in Building C; (c) obtained or reviewed the shipper instructions issued by Cantera Chemical Supply Co. or any other shipper; (d) ascertained the correct OSHA classification of the chemicals stored in Building C; or (e) analyzed the applicability of 29 C.F.R. § 1910.106 to Class IIIB combustible liquids. The assertion that OSHA 29 C.F.R. § 1910.106 segregation requirements apply to Class IIIB combustible liquids is factually and legally incorrect, as discussed above, and strongly suggests that Meridian invoked Exclusion 4(f) without a reasonable basis and without conducting a reasonable investigation. Such conduct constitutes an unfair claims handling practice under Section 541.060(a)(7) and reflects a pattern of post-hoc rationalization rather than legitimate claims evaluation.
VI. Actual Damages
Pursuant to Texas Insurance Code § 541.154, the following is a statement of the specific amount of actual damages and expenses, including attorney's fees, reasonably incurred by SLG as a result of Meridian's unfair or deceptive acts or practices. SLG's actual damages include, but are not limited to, the following:
1. Net Indemnity Owed Under the Policy: $4,530,000, representing the total documented cargo loss of $4,780,000, less the $250,000 per-occurrence self-insured retention under Policy No. IML-TX-0039821-2023. This amount is supported by the sworn Proof of Loss prepared by Whitlock & Associates, Certified Public Accountants, P.C., and submitted to Meridian on February 1, 2024.
2. Consequential Damages: SLG has sustained consequential damages arising from Meridian's wrongful denial, including but not limited to: (a) loss of use of funds that should have been paid under the Policy; (b) business disruption costs incurred as a result of the inability to promptly replace destroyed cargo and resume normal operations at the Midland Facility; (c) increased insurance costs and related expenses; and (d) costs incurred by SLG in pursuing the claim, including the costs of the Ridgeline forensic investigation, the Whitlock & Associates engagement, and the JAMS mediation. The specific amount of consequential damages continues to accrue and will be quantified in connection with any litigation.
3. Attorney's Fees and Costs of Suit: SLG has incurred, and will continue to incur, reasonable and necessary attorney's fees and litigation costs in connection with this matter. These amounts will be documented and proven at trial or other appropriate proceeding.
The specific amount of actual damages as of the date of this letter attributable to policy benefits wrongfully withheld by Meridian is $4,530,000. Additional consequential damages, attorney's fees, and costs continue to accrue.
VII. Additional Statutory Remedies
In addition to actual damages, SLG is entitled to the following additional statutory remedies:
A. Treble Damages — Tex. Ins. Code § 541.152
Texas Insurance Code § 541.152(b) provides that a plaintiff who prevails on a claim under Chapter 541 is entitled to recover up to three (3) times the amount of actual damages upon a finding that the defendant's acts were committed "knowingly." SLG contends that Meridian's unfair and deceptive acts or practices, as described herein, were committed knowingly. Meridian was in possession of all material facts — including the Ridgeline Report, the Proof of Loss, the warehouse layout documentation, and the OSHA regulatory framework — and nonetheless persisted in denying SLG's valid claim and refusing to offer a reasonable settlement. Accordingly, SLG is entitled to recover treble damages in the amount of up to $13,590,000 (three times the $4,530,000 in policy benefits wrongfully withheld), in addition to any treble-damage recovery based on consequential damages.
B. Attorney's Fees — Tex. Ins. Code § 541.152(a)(1)
Texas Insurance Code § 541.152(a)(1) provides that a plaintiff who prevails under Chapter 541 is entitled to recover "court costs and reasonable and necessary attorney's fees." SLG intends to seek recovery of all attorney's fees incurred and to be incurred in the prosecution of this matter, through trial and any subsequent appeals.
C. Prompt Payment Penalties — Tex. Ins. Code Chapter 542
Meridian has also violated the Texas Prompt Payment of Claims Act, codified at Chapter 542 of the Texas Insurance Code (Subchapter B, §§ 542.051–542.061). The Prompt Payment Act imposes statutory deadlines on insurers for acknowledging, investigating, and paying claims, and provides enhanced penalties — including statutory interest at the rate of eighteen percent (18%) per annum — for untimely payment.
SLG submitted its sworn Proof of Loss to Meridian on February 1, 2024. Under Chapter 542, Meridian was required to accept or deny the claim within the time periods specified by the statute. Accounting for the applicable statutory deadlines, the sixty-first (61st) business day after Meridian's receipt of all items, statements, and forms reasonably requested and required under the Policy falls on or about April 29, 2024. Meridian denied SLG's claim on January 22, 2024, well within the statutory period; however, the denial was wrongful for the reasons set forth herein. Under established Texas law, a wrongful denial does not toll or satisfy the insurer's obligation to make timely payment. See Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995).
Under Texas Insurance Code § 542.060, SLG is entitled to recover the amount of the claim plus interest on the amount of the claim at the rate of eighteen percent (18%) per annum, calculated from the date on which payment was due. As of the date of this letter, July 1, 2024, the estimated penalty interest on $4,530,000 at eighteen percent (18%) per annum is continuing to accrue. Through an estimated resolution date in August 2024, accrued penalty interest is approximately $250,128. These penalties continue to accrue on a daily basis until Meridian makes full payment of the amounts owed under the Policy.
SLG expressly reserves its right to recover all penalty interest accruing under Chapter 542, calculated through the date of actual payment, as well as reasonable attorney's fees recoverable under Section 542.060.
VIII. Demand and Notice of Intent to Sue
Based on the foregoing, SLG hereby demands that Meridian pay the following amounts within sixty (60) days of Meridian's receipt of this letter:
1. The full net claim amount of $4,530,000 under Policy No. IML-TX-0039821-2023;
2. Accrued statutory penalty interest under Texas Insurance Code § 542.060 at the rate of eighteen percent (18%) per annum, calculated from April 29, 2024 through the date of actual payment; and
3. Reasonable and necessary attorney's fees and costs incurred by SLG in connection with this matter through the date of resolution.
If this matter is not fully and finally resolved within the sixty (60)-day period prescribed by Texas Insurance Code § 541.154, SLG intends to file suit against Meridian Surety & Indemnity Company in the District Court of Midland County, Texas, asserting the following claims:
• Breach of the Insurance Contract, for Meridian's wrongful denial of SLG's valid claim under Policy No. IML-TX-0039821-2023;
• Violations of Texas Insurance Code Chapter 541, including unfair settlement practices and unfair or deceptive acts or practices, with claims for actual damages, treble damages under § 541.152(b), and attorney's fees under § 541.152(a)(1); and
• Violations of Texas Insurance Code Chapter 542, including failure to comply with the Prompt Payment of Claims Act, with claims for eighteen percent (18%) per annum penalty interest under § 542.060 and attorney's fees.
SLG expressly reserves all rights, claims, and remedies available at law or in equity, including but not limited to claims for breach of the duty of good faith and fair dealing, common-law bad faith, and any other claims that may arise from Meridian's conduct. No right, claim, or remedy is waived by the transmission of this notice, by any prior communication or negotiation, or by SLG's participation in the June 20, 2024 mediation.
IX. Direction to Communicate Through Counsel
SLG is represented by this firm in connection with all matters relating to the above-referenced claim, the Policy, and any disputes arising therefrom. All communications regarding this matter — whether written, electronic, or oral — should be directed exclusively to the undersigned at:
Calderwood & Harkness LLP 700 Louisiana Street, Suite 4500 Houston, Texas 77002 Telephone: (713) 555-9200 Facsimile: (713) 555-9201
Email: hbellamy@calderwoodharkness.com
Reference: C&H Matter No. 1012-00003
Please do not contact SLG or any of its officers, directors, employees, or representatives directly regarding this matter. Any such communications should be directed through this office.
We trust that Meridian will give this matter the prompt and serious attention it warrants. SLG remains willing to engage in good-faith negotiations to resolve this dispute, but will not hesitate to pursue its full legal remedies if Meridian fails to make prompt and adequate payment within the time specified.
Sincerely,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Bellamy Partner
700 Louisiana Street, Suite 4500 Houston, Texas 77002 Telephone: (713) 555-9200
Email: hbellamy@calderwoodharkness.com
cc: (via email and first-class mail)
Marcus D. Stonefield, Chief Executive Officer Stonefield Logistics Group Inc. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701
Dale Engstrom, Vice President of Risk Management Stonefield Logistics Group Inc. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701
Victoria Kessler, Esq. Kessler, Brandt & Howe LLP 1401 McKinney Street, Suite 2800 Houston, TX 77010 (Coverage Counsel for Meridian Surety & Indemnity Company)
Enclosures: None. The prior demand letter dated April 12, 2024, the Ridgeline Forensic Consultants LLC report dated February 28, 2024, the sworn Proof of Loss dated February 1, 2024, and the JAMS mediation materials were previously furnished to Meridian and its counsel.

CALDERWOOD & HARKNESS LLP Attorneys at Law

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CALDERWOOD & HARKNESS LLP

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