1012-00003 · Stonefield Logistics Group · Dispute Resolution

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CONFIDENTIAL MEDIATION POSITION STATEMENT OF STONEFIELD LOGISTICS GROUP INC.

Submitted to: Hon. Margaret Colquitt (Ret.), Mediator JAMS Houston

JAMS Case No.: 1440-02917-2024

Date of Submission: June 17, 2024

Date of Mediation Session: June 20, 2024

Prepared by:

Howard Bellamy, Responsible Partner Andrew Fitzpatrick, Lead Associate CALDERWOOD & HARKNESS LLP 700 Louisiana Street, Suite 4500 Houston, TX 77002 Telephone: (713) 555-4100 Facsimile: (713) 555-4101

On Behalf of:

STONEFIELD LOGISTICS GROUP INC. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701

Opposing Party:

MERIDIAN SURETY & INDEMNITY COMPANY 600 Scioto Crossing, Suite 1200 Columbus, OH 43215

Opposing Counsel:

Victoria Kessler, Lead Partner Samuel Okonkwo, Associate KESSLER, BRANDT & HOWE LLP 1401 McKinney Street, Suite 2800 Houston, TX 77010

CONFIDENTIALITY NOTICE: This Mediation Position Statement is submitted pursuant to the JAMS Mediation Rules and is intended solely for the use of the Mediator. This statement and its contents are confidential, privileged, and inadmissible in any subsequent proceeding pursuant to Tex. Civ. Prac. & Rem. Code § 154.073. No portion of this statement may be disclosed, reproduced, or distributed to any party, counsel, or third person without the prior written consent of Stonefield Logistics Group Inc. and its counsel.

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I. INTRODUCTION AND SUMMARY OF DISPUTE

Stonefield Logistics Group Inc. ("SLG" or the "Company") respectfully submits this Confidential Mediation Position Statement to Hon. Margaret Colquitt (Ret.) in advance of the mediation session scheduled for June 20, 2024, at JAMS Houston. SLG approaches this mediation in good faith and with a genuine desire to resolve this dispute, but is simultaneously prepared to pursue its claims through litigation in Midland County, Texas if a fair resolution cannot be achieved.

SLG is a Texas-based intermodal freight brokerage, trucking, and transload/warehousing company headquartered in Midland, Texas. The Company operates fourteen terminals across Texas, New Mexico, and Oklahoma, specializing in Permian Basin oilfield supply-chain logistics. SLG handles a wide range of oilfield freight, including casing pipe, proppant, completion chemicals, and heavy equipment, providing critical logistics infrastructure for some of the most active oil and gas production operations in the United States. SLG is a portfolio company of Irongate Capital Partners, LP, which acquired a 72% equity interest in SLG in August 2019 through Irongate Industrial Partners Fund IV, LP. In fiscal year 2023, SLG generated revenue of approximately $187.4 million and EBITDA of approximately $29.1 million, employing approximately 1,100 people across its operations.

On November 17, 2023, a catastrophic warehouse fire struck SLG's Midland Facility — specifically, Warehouse Building C, located at 4501 East County Road 130, Midland, TX 79706. The fire, which originated from an electrical fault in the building's main distribution panel, destroyed approximately $4.78 million in customer freight that was in SLG's care, custody, and control at the time of the loss. The fire was an accidental, electrical-origin event — precisely the type of fortuitous loss covered under SLG's all-risk Inland Marine Cargo Legal Liability Policy.

SLG holds an all-risk Inland Marine Cargo Legal Liability Policy, Policy No. IML-TX-0039821-2023, issued by Meridian Surety & Indemnity Company ("Meridian"). Meridian is an Ohio-domiciled stock insurance company (NAIC No. 28471), carrying an A.M. Best Rating of A (Excellent), Financial Size Category IX. The Policy provides a per-occurrence limit of $5,000,000 and an annual aggregate limit of $10,000,000, subject to a $250,000 self-insured retention ("SIR") per occurrence. The annual premium for the Policy is $174,600, and the policy period runs from April 1, 2023 through March 31, 2024. The loss at issue falls squarely within the policy period.

Despite the clarity of coverage, Meridian formally denied SLG's claim on January 22, 2024. In its denial letter, Meridian invoked two policy exclusions: Exclusion 4(f), the "Improper Storage" exclusion, and Exclusion 4(k), the "Failure to Maintain" exclusion. As detailed at length in this Position Statement, both exclusions are inapplicable as a matter of fact and law. The factual predicates Meridian has asserted in support of these exclusions are demonstrably incorrect, and the legal standards governing the application of exclusions under Texas law foreclose Meridian's position. Meridian's wrongful denial exposes it to substantial statutory liability under the Texas Insurance Code, including penalty interest under Chapter 542 and potential treble damages and attorney's fees under Chapter 541.

SLG's net claim under the Policy — total cargo loss of $4,780,000, less the $250,000 SIR — amounts to $4,530,000. This amount is well within the $5,000,000 per-occurrence limit, and no prior claims have been made under the Policy during the current policy period, meaning the $10,000,000 annual aggregate limit is not implicated.

On April 12, 2024, SLG, through undersigned counsel, submitted a formal demand letter to Meridian demanding payment of the full $4,530,000 indemnity amount, together with statutory penalties and remedies under the Texas Insurance Code. On May 6, 2024, Meridian, through its coverage counsel at Kessler, Brandt & Howe LLP, responded with a "compromise" offer of only $1,750,000 — less than 39% of the net claim amount. SLG rejected this offer as wholly inadequate given the overwhelming strength of SLG's coverage position and the absence of any meritorious basis for the invoked exclusions.

SLG brings this matter to mediation in good faith and with a sincere hope that a fair resolution can be reached. However, SLG must be candid with the Mediator: if Meridian does not substantially revise its position and agree to a settlement that reflects the merits of SLG's claim, SLG is fully prepared to file suit in Midland County, Texas, seeking not only the indemnity amount but the full panoply of statutory remedies available under the Texas Insurance Code, including penalty interest, treble damages, and attorney's fees.

II. THE PARTIES

A. Stonefield Logistics Group Inc.

Stonefield Logistics Group Inc. is a Texas corporation with Federal Employer Identification Number 84-3291057. Its principal office and headquarters are located at 2900 Petroleum Tower Boulevard, Suite 400, Midland, TX 79701. The Company's registered agent is CT Statutory Services, Inc., 1999 Bryan Street, Suite 900, Dallas, TX 75201.

SLG was founded in 1987 and has grown into a mid-market intermodal freight brokerage, trucking, and transload/warehousing company that serves as a critical link in the Permian Basin oilfield supply chain. The Company handles a diverse range of oilfield freight, including casing pipe, proppant, completion chemicals, downhole tools, and heavy equipment. SLG operates fourteen terminals strategically located across Texas, New Mexico, and Oklahoma, enabling it to provide comprehensive logistics services to upstream and midstream operators throughout the Permian Basin.

SLG's current senior leadership includes Marcus D. Stonefield, the Company's Chief Executive Officer and the founder's grandson, who has led the Company since 2015. The Company's Chief Financial Officer is Leah Tran, and its Vice President of Risk Management is Dale Engstrom. Mr. Engstrom has been instrumental in managing the Company's insurance program and overseeing the claim submission process that is the subject of this dispute.

In August 2019, Irongate Capital Partners, LP acquired a 72% equity interest in SLG through Irongate Industrial Partners Fund IV, LP. The Irongate acquisition brought additional capital and operational resources to SLG, enabling the Company to expand its terminal network and invest in facility improvements, including upgrades to warehouse safety systems. In fiscal year 2023, SLG generated revenue of approximately $187.4 million and EBITDA of approximately $29.1 million, and the Company employed approximately 1,100 people.

B. Meridian Surety & Indemnity Company

Meridian Surety & Indemnity Company is an Ohio-domiciled stock insurance company with its principal office at 600 Scioto Crossing, Suite 1200, Columbus, OH 43215. Meridian's NAIC number is 28471, and it carries an A.M. Best Rating of A (Excellent), Financial Size Category IX. Meridian is a well-capitalized specialty insurer that writes inland marine, surety, and commercial lines coverage across multiple states, including Texas.

The Meridian claims personnel primarily responsible for handling SLG's claim include Patricia Ng, Vice President of Claims and the handling adjuster assigned to the file, and Brian Woolf, Senior Claims Examiner. Meridian's coverage counsel in this matter is the law firm of Kessler, Brandt & Howe LLP ("KBH"), with lead partner Victoria Kessler and associate Samuel Okonkwo serving as Meridian's counsel of record. KBH's offices are located at 1401 McKinney Street, Suite 2800, Houston, TX 77010.

C. SLG's Counsel

SLG is represented in this matter by Calderwood & Harkness LLP, 700 Louisiana Street, Suite 4500, Houston, TX 77002. The responsible partner is Howard Bellamy, and the lead associate is Andrew Fitzpatrick. Calderwood & Harkness is a full-service law firm with deep experience in insurance coverage litigation, first-party property and marine insurance claims, and Texas Insurance Code bad-faith actions.

D. SLG's Insurance Broker

SLG's Inland Marine Cargo Legal Liability Policy was placed by Calvert & Strauss Insurance Brokers, Inc., 3700 Buffalo Speedway, Suite 520, Houston, TX 77098. The account executive responsible for SLG's account is Jason Muñoz. Calvert & Strauss assisted SLG with the initial submission of the claim to Meridian following the November 17, 2023 fire, including providing prompt written notice of the loss event as required under the Policy.

III. THE LOSS EVENT — NOVEMBER 17, 2023 FIRE

A. Factual Summary

On November 17, 2023, at approximately 2:14 a.m. CST, a fire broke out in Warehouse Building C at SLG's Midland Facility, located at 4501 East County Road 130, Midland, TX 79706. Warehouse Building C is a 42,000-square-foot steel-frame warehouse facility used by SLG for the storage of customer freight, including casing pipe, completion chemicals, downhole tools, and miscellaneous oilfield supply-chain materials. The building was constructed in 2011 and was equipped with modern fire-protection systems at the time of its original construction.

The fire originated in the Building C main electrical distribution panel — a Square D Model QED-2 electrical panel that had been installed in 2011 as part of the building's original construction. The cause of the fire was electrical arcing within the distribution panel. The arcing ignited adjacent combustible packaging materials that were stored in the immediate vicinity of the panel, and the fire then spread rapidly throughout the warehouse.

Warehouse Building C was equipped with a wet-pipe automatic sprinkler system that was compliant with NFPA 13 (Standard for the Installation of Sprinkler Systems) at the time of its installation in 2011. The sprinkler system did activate in response to the fire. However, the system's suppression capability was significantly limited on the night of the fire because the municipal water-supply pressure feeding the sprinkler system was only 36 psi actual, compared to the 52 psi design parameter that the system required for full operational effectiveness. This 31% deficit in water-supply pressure — a condition entirely outside SLG's control and attributable to the municipal water authority — substantially undermined the sprinkler system's ability to suppress the fire, regardless of the system's maintenance status.

The Midland Fire Department received the alarm and responded promptly, arriving at the scene at approximately 2:31 a.m. CST — approximately seventeen minutes after the fire's ignition. Despite the Fire Department's efforts, the fire was not fully contained until approximately 4:45 a.m. CST, more than two and a half hours after it began. By that time, substantial damage had been done to both the building structure and the customer freight stored inside.

Warehouse Building C was ultimately declared a total structural loss. The building damage, estimated at $1,350,000, is covered under a separate commercial property insurance policy and is not at issue in this dispute. The dispute before this Mediator concerns exclusively the destruction of customer cargo that was in SLG's care, custody, and control at the time of the fire — cargo with a total documented value of $4,780,000.

B. Independent Forensic Investigation — Ridgeline Forensic Consultants LLC

Following Meridian's issuance of a Reservation of Rights letter on December 4, 2023, and in anticipation of a potential coverage dispute, Calderwood & Harkness retained Ridgeline Forensic Consultants LLC on February 12, 2024, on behalf of SLG, to conduct an independent origin-and-cause investigation of the Warehouse Building C fire. Ridgeline Forensic Consultants LLC is a nationally recognized forensic engineering firm specializing in fire-origin-and-cause investigation, electrical failure analysis, and fire-suppression system evaluation. The lead investigator assigned to the engagement was Dr. William Creech, P.E., CFEI, whose offices are located at 9100 Sovereign Row, Suite 210, Dallas, TX 75247. Dr. Creech holds both a Professional Engineering license and a Certified Fire and Explosion Investigator credential, and he has more than twenty-five years of experience conducting fire-origin-and-cause investigations for insurance carriers, policyholders, and government agencies.

The Ridgeline forensic report was completed and delivered on March 15, 2024. The report reflects an exhaustive investigation, including physical examination of the fire scene, analysis of the electrical distribution panel remnants, review of fire department records and incident reports, interviews with SLG personnel, analysis of the sprinkler system components and water-supply data, and review of SLG's warehouse layout documentation. The key findings of the Ridgeline report are as follows:

1. Fire Origin and Cause. The fire originated in the Square D Model QED-2 main electrical distribution panel located in Warehouse Building C. The cause of the fire was electrical arcing within the panel. The arcing was attributable to age-related degradation of internal bus bar connections and was not caused by any external factor, act, or omission of SLG.

2. No Causal Relationship to Storage Practices or Sprinkler Maintenance. The fire was not caused by any act or omission of SLG related to cargo storage practices or sprinkler system maintenance. The fire originated in the electrical panel, not in any stored cargo or fire-suppression component. SLG's storage practices and sprinkler maintenance status were irrelevant to the fire's origin.

3. Municipal Water-Supply Pressure Deficit. Even a fully code-compliant sprinkler system operating at its design pressure of 52 psi would not have prevented the loss, given the documented municipal water-supply pressure deficit on the night of the fire. The actual municipal water-supply pressure feeding the Warehouse Building C sprinkler system was only 36 psi — a 31% deficit from the system's design parameter. This pressure deficit was attributable to the municipal water authority and was entirely outside SLG's control.

4. Cargo Segregation Confirmed. Post-fire forensic mapping of the warehouse debris field confirmed that SLG's cargo segregation layout, as documented in SLG's Warehouse Layout Plan Rev. 7 (dated June 2023), was maintained at the time of the fire. Specifically, pipe storage was confined to Bays 1 through 4, chemical pallets were confined to Bays 9 through 12, and a 40-foot buffer zone consisting of Bays 5 through 8 (used for tools and equipment) separated the pipe and chemical storage areas.

SLG intends to make the full Ridgeline forensic report available to the Mediator during the mediation session, and SLG is confident that the report's findings comprehensively rebut both of the exclusions Meridian has invoked.

IV. CARGO LOSS AND QUANTIFICATION

A. Destroyed Cargo — Itemized

The fire at Warehouse Building C destroyed customer freight belonging to multiple shippers. The following table sets forth the itemized cargo losses, each of which has been documented and verified through SLG's warehouse management system records, bills of lading, shipper invoices, and the sworn proof of loss prepared by Whitlock & Associates, Certified Public Accountants, P.C.:

The valuations reflected in the table above are based on the replacement cost of the destroyed freight, as determined through review of shipper invoices, purchase orders, and market pricing data. Each shipper has confirmed the value of its destroyed cargo, and those confirmations are reflected in the supporting documentation accompanying the sworn proof of loss.

B. Proof of Loss

SLG engaged Whitlock & Associates, Certified Public Accountants, P.C. to prepare a sworn proof of loss in accordance with Policy Section 8(c). Whitlock & Associates is a Midland-based CPA firm with deep experience in insurance loss quantification, particularly in the oilfield services sector. The engagement partner was Sandra Whitlock, CPA, CFF, whose offices are located at 4200 South Loop 250 West, Suite 100, Midland, TX 79703. Ms. Whitlock holds both the Certified Public Accountant and Certified in Financial Forensics credentials and has prepared sworn proofs of loss in numerous insurance claims involving commercial property and cargo losses.

The sworn proof of loss was submitted to Meridian on February 1, 2024. This submission was well within the 90-day proof-of-loss period required by Policy Section 8(c). The loss occurred on November 17, 2023, and 90 days from that date falls on approximately February 15, 2024. SLG's submission on February 1, 2024, was therefore made with two weeks to spare. The sworn proof of loss was accompanied by extensive supporting documentation, including warehouse management system records, bills of lading, shipper invoices, purchase orders, shipper confirmation letters, and the Whitlock firm's independent valuation analysis.

C. Net Claim Calculation

The net claim amount payable under the Policy is calculated as follows:

The net claim amount of $4,530,000 is well within the Policy's per-occurrence limit of $5,000,000. No prior claims have been submitted under the Policy during the current policy period (April 1, 2023 through March 31, 2024), and accordingly the $10,000,000 annual aggregate limit is not implicated. There is no colorable argument that the Policy's limits are insufficient to pay SLG's claim in full.

V. THE MERIDIAN POLICY — COVERAGE GRANT AND KEY TERMS

A. Policy Identification

The key terms of the Meridian Policy are set forth below for the Mediator's reference:

The Policy was placed by SLG's insurance broker, Calvert & Strauss Insurance Brokers, Inc. (Account Executive: Jason Muñoz), and was bound effective April 1, 2023. The Policy has been continuously in force throughout the policy period, and all premiums have been paid in full and on time. SLG has been in full compliance with all policy conditions.

B. Coverage Grant

The Policy's insuring agreement provides coverage for:

"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…"

This is a broad, all-risk coverage grant. Under well-settled Texas law, an all-risk policy covers all fortuitous losses unless specifically excluded. See Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex. 2006) ("An all-risk policy insures against all risks of physical loss except those that are specifically excluded."). The insured's burden under an all-risk policy is simply to demonstrate that a covered loss occurred; the burden then shifts to the insurer to prove the applicability of any exclusion. See Nat'l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 556 (Tex. 1991).

The fire at Warehouse Building C on November 17, 2023, and the resulting destruction of customer cargo, constitutes a "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 … warehousing … operations." This is precisely the type of loss the Policy was designed to cover, and the loss falls squarely within the coverage grant. Meridian does not appear to dispute that the loss, in the absence of an applicable exclusion, would be covered. The entire dispute turns on whether Meridian can establish the applicability of one or both of the two exclusions it has invoked. As demonstrated below, it cannot.

C. Notice and Proof-of-Loss Compliance

SLG has satisfied all procedural requirements under the Policy:

Notice of Loss (Policy Section 8(a)). Section 8(a) of the Policy requires the insured to provide written notice to the insurer within thirty days of the loss event. SLG provided timely notice of the November 17, 2023 fire through its insurance broker, Calvert & Strauss. Written notice was transmitted to Meridian promptly following the fire. Meridian does not dispute the timeliness of SLG's notice.

Sworn Proof of Loss (Policy Section 8(c)). Section 8(c) of the Policy requires the insured to submit a sworn proof of loss within ninety days of the loss event. SLG, through Whitlock & Associates, submitted a comprehensive sworn proof of loss to Meridian on February 1, 2024 — well within the ninety-day period, which expired on approximately February 15, 2024. Meridian does not dispute the timeliness or sufficiency of SLG's proof of loss.

All procedural conditions precedent to coverage have been satisfied. There are no outstanding procedural defenses available to Meridian.

VI. MERIDIAN'S DENIAL AND ITS DEFICIENCIES

A. Procedural History of the Claim

The procedural history of Meridian's handling of this claim is both illuminating and troubling. The key dates are as follows:

• November 17, 2023: The fire occurs at Warehouse Building C. SLG provides prompt notice to Meridian through its broker, Calvert & Strauss.

• December 4, 2023: Meridian issues a Reservation of Rights letter, seventeen days after receiving notice of the loss. Critically, this letter cited only Exclusion 4(k) — the "Failure to Maintain" exclusion. Exclusion 4(f) — the "Improper Storage" exclusion — was not mentioned in the Reservation of Rights letter.

• February 1, 2024: SLG submits its sworn proof of loss, prepared by Whitlock & Associates, to Meridian.

• January 22, 2024: Meridian issues its formal denial letter. For the first time, Meridian invokes both Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain) as grounds for denial.

There is a critical procedural deficiency in Meridian's claims handling that the Mediator should note: Exclusion 4(f) — the "Improper Storage" exclusion — was raised for the first time in Meridian's January 22, 2024 denial letter, more than two months after the Reservation of Rights letter was issued. This exclusion was not identified in the December 4, 2023 Reservation of Rights letter, despite Meridian's obligation to identify all potential grounds for denial at the reservation stage. The belated assertion of Exclusion 4(f) raises serious questions about whether Meridian conducted an adequate investigation before denying the claim and whether the invocation of this exclusion was a post hoc rationalization designed to bolster a weak denial. This procedural irregularity is relevant to SLG's bad-faith claims under Texas Insurance Code § 541.060, as discussed in Section VII below.

B. Exclusion 4(f) — "Improper Storage"

Policy Language. Exclusion 4(f) of the Policy provides as follows:

"This Policy does not apply to 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…"

Meridian's Allegation. In its January 22, 2024 denial letter, Meridian alleged that SLG stored casing pipe and completion chemicals in the same warehouse bay, in violation of the shipper's written storage instructions and in violation of OSHA segregation requirements set forth in 29 CFR § 1910.106. According to Meridian, this co-storage of incompatible materials constituted "improper storage" within the meaning of Exclusion 4(f) and resulted in the cargo loss.

Why Exclusion 4(f) Does Not Apply. Meridian's position is factually baseless and legally untenable for the following reasons:

First, SLG did not store casing pipe and completion chemicals in the same warehouse bay. SLG's Warehouse Layout Plan Rev. 7, dated June 2023, establishes a clear and well-documented segregation protocol for Warehouse Building C. Under this layout plan, pipe storage was confined to Bays 1 through 4 on the north side of the warehouse. Chemical pallets were confined to Bays 9 through 12 on the south side of the warehouse. Bays 5 through 8, in the center of the warehouse, were designated for tools and equipment storage, creating a 40-foot buffer zone between the pipe and chemical storage areas. This layout plan was in effect at the time of the fire and was being followed by SLG's warehouse personnel.

Second, the Ridgeline forensic report independently confirmed that SLG's cargo segregation layout was maintained at the time of the fire. Dr. Creech and his team conducted detailed post-fire forensic mapping of the warehouse debris field, correlating the locations of burned and damaged cargo remnants with the pre-fire layout plan. This mapping confirmed that pipe materials and chemical pallets were in their designated bays and were not co-mingled. Meridian's factual assertion to the contrary is simply wrong.

Third, even if pipe and chemicals had been stored in closer proximity than the layout plan dictated — which they were not — the shipper's written storage instructions do not support Meridian's position. The storage instructions provided by Cantera Chemical Supply Co. for its completion chemicals required "segregation from incompatible materials per SDS" (Safety Data Sheet). The Cantera chemicals are classified as Class IIIB combustible liquids, with a flash point above 200°F. Casing pipe is inert steel — it is not an "incompatible material" with respect to Class IIIB combustible liquids under any reasonable interpretation of the shipper's instructions or the relevant Safety Data Sheets.

Fourth, Meridian's reliance on OSHA 29 CFR § 1910.106 is misplaced as a matter of regulatory applicability. Section 1910.106 governs the storage and handling of flammable and combustible liquids. Its segregation requirements apply to liquids classified as Class I (flammable), Class II (combustible, flash point 100°F–140°F), and Class IIIA (combustible, flash point 140°F–200°F). Class IIIB combustible liquids — those with flash points at or above 200°F, which is the classification of the Cantera chemicals — are expressly excluded from the scope of § 1910.106's most stringent segregation and storage requirements. Meridian's citation to this regulation demonstrates either a fundamental misunderstanding of the applicable regulatory framework or a willful mischaracterization of it.

Fifth, even assuming arguendo that there was some technical deviation from storage protocols — which SLG categorically denies — the Exclusion 4(f) language requires that the loss "result from" the improper storage. The fire originated in the electrical distribution panel. It did not originate in, and was not caused by, any aspect of cargo storage or cargo segregation. The location of the cargo within the warehouse was irrelevant to the fire's ignition and initial spread. Meridian cannot establish the required causal nexus between the alleged improper storage and the loss.

In sum, Exclusion 4(f) does not apply because: (a) SLG's storage practices were entirely consistent with the shipper's written instructions and applicable industry standards; (b) the Ridgeline forensic investigation confirmed compliance; (c) the OSHA regulation Meridian cites does not apply to the chemicals at issue; and (d) Meridian cannot establish any causal relationship between SLG's storage practices and the fire loss. Meridian bears the burden of proving the applicability of this exclusion, and it cannot carry that burden on these facts.

C. Exclusion 4(k) — "Failure to Maintain"

Policy Language. Exclusion 4(k) of the Policy provides as follows:

"This Policy does not apply to 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…"

Meridian's Allegation. 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 Warehouse Building C sprinkler system in accordance with NFPA 25 (Standard for the Inspection, Testing, and Maintenance of Water-Based Fire Protection Systems). Specifically, Meridian asserted that the last annual full-flow inspection of the sprinkler system was performed on September 14, 2022, and that the system should have been re-inspected by September 14, 2023, pursuant to NFPA 25. Because the fire occurred on November 17, 2023 — approximately two months after the annual inspection was purportedly due — Meridian contends that SLG failed to maintain the sprinkler system and that this failure triggered Exclusion 4(k).

Why Exclusion 4(k) Does Not Apply. Meridian's reliance on Exclusion 4(k) fails for three independent reasons, any one of which is dispositive.

1. SLG's Maintenance Record Demonstrates Diligent Compliance. SLG maintained the Warehouse Building C sprinkler system diligently and in substantial compliance with NFPA 25. SLG conducted all required quarterly visual inspections of the sprinkler system in accordance with NFPA 25 § 5.2.1. The quarterly inspections were performed on the following dates:

• December 15, 2022

• March 20, 2023

• June 12, 2023

• September 8, 2023

Each of these quarterly inspections was documented in SLG's fire-protection system maintenance records, which are available for the Mediator's review.

With respect to the annual full-flow test required by NFPA 25 § 5.3.2, SLG acknowledges that the last annual full-flow test was performed on September 14, 2022, and that the next annual full-flow test was due on or about September 14, 2023. SLG does not dispute that the annual full-flow test had not been performed as of the date of the fire on November 17, 2023. However, the circumstances surrounding this scheduling gap demonstrate the absence of any negligence or willful inaction on SLG's part.

SLG's fire-protection contractor, Lone Star Fire Protection Inc., experienced a significant scheduling backlog in the fall of 2023, attributable in part to a surge in inspection demand across the Permian Basin region. SLG had issued a written engagement letter to Lone Star Fire Protection Inc. dated August 28, 2023 — well in advance of the September 14, 2023 inspection deadline — confirming an appointment for the annual full-flow inspection. The inspection was ultimately scheduled by Lone Star for November 20, 2023. This appointment was only three days after the fire. SLG acted diligently and proactively in scheduling the inspection; the brief delay beyond the annual anniversary date was attributable entirely to the contractor's scheduling constraints, not to any neglect or intentional omission by SLG.

The existence of the August 28, 2023 engagement letter and the November 20, 2023 scheduled appointment date establish that SLG was actively and diligently pursuing compliance with the annual full-flow test requirement. A reasonable insurer investigating these facts would not characterize this brief, contractor-caused scheduling delay as a "failure to maintain" fire-suppression systems within the meaning of Exclusion 4(k).

2. No Causal Nexus Between the Alleged Maintenance Gap and the Loss. Even if SLG's annual full-flow inspection gap could be characterized as a "failure to maintain" within the meaning of Exclusion 4(k) — which SLG denies — the exclusion would still not apply because Meridian cannot establish the required causal nexus.

The text of Exclusion 4(k) is critical. It does not exclude all losses that occur in a facility with a maintenance deficiency. Rather, it excludes only losses "caused by or resulting from" the insured's failure to maintain fire-protection systems. The exclusion's own language imposes a causation requirement: the failure to maintain must have caused or resulted in the loss. This is not a mere condition-based exclusion; it requires a demonstrable causal connection between the alleged maintenance failure and the insured loss.

The Ridgeline forensic report conclusively establishes the absence of any such causal connection:

First, the fire originated in the Square D Model QED-2 main electrical distribution panel, not in any component of the sprinkler system. The sprinkler system did not cause the fire. The cause of the fire — electrical arcing in the distribution panel — is wholly unrelated to the sprinkler system's maintenance status.

Second, even a fully code-compliant sprinkler system, having undergone a timely annual full-flow inspection, operating at its design pressure of 52 psi, would not have prevented the loss. The critical factor limiting the sprinkler system's suppression capability was not any maintenance deficiency but rather the municipal water-supply pressure deficit. The actual water-supply pressure on the night of the fire was only 36 psi — a 31% shortfall from the 52 psi design parameter. This pressure deficit rendered the sprinkler system incapable of delivering sufficient water flow to suppress the fire, regardless of the system's maintenance status. A fully inspected and maintained sprinkler system receiving only 36 psi of water pressure would have performed no differently than the system in place on November 17, 2023.

The undisputed forensic evidence therefore establishes that the alleged gap in the annual full-flow test did not cause, contribute to, or result in the cargo loss in any way. Meridian cannot carry its burden of proving causation, and Exclusion 4(k) therefore does not apply.

3. Legal Standard — The Insurer Bears the Burden of Proving Exclusion Applicability. The Texas Supreme Court has established a clear burden-of-proof framework for insurance coverage disputes. Under Northgate Indemnity Co. v. Hudson Energy Co., 811 S.W.2d 552 (Tex. 1991), the burden of proving the applicability of a policy exclusion rests squarely on the insurer. The insured bears only the initial burden of demonstrating that a covered loss occurred. Once the insured has carried that burden — as SLG plainly has here — the burden shifts to the insurer to prove that a specific exclusion applies to defeat coverage.

Moreover, under well-settled principles of Texas insurance law, policy exclusions are construed strictly and narrowly, and any ambiguity in an exclusion is resolved in favor of coverage. See Nat'l Union Fire Ins. Co., 811 S.W.2d at 556; Balandran v. Harborline Casualty Group, 972 S.W.2d 738, 741 (Tex. 1998). These interpretive principles exist because the insurer drafted the policy language and is in the best position to craft unambiguous exclusions. Where the insurer has failed to do so, the insured should not bear the consequences of that drafting choice.

Applied here, Meridian bears the burden of establishing that both Exclusion 4(f) and Exclusion 4(k) apply to this loss. For the reasons set forth above, Meridian has failed to carry this burden as to either exclusion, and it will not be able to carry this burden at trial. The factual predicates Meridian has asserted are contradicted by the documentary evidence and the independent forensic investigation, and the legal standards governing exclusion interpretation disfavor Meridian's position at every turn.

VII. MERIDIAN'S EXPOSURE UNDER THE TEXAS INSURANCE CODE

Meridian's wrongful denial of SLG's claim does not merely entitle SLG to the indemnity amount due under the Policy. It also exposes Meridian to substantial statutory liability under the Texas Insurance Code, which provides powerful remedies for policyholders whose claims are wrongfully denied or unreasonably delayed. SLG's statutory claims significantly amplify Meridian's financial exposure in this matter and provide a compelling incentive for Meridian to resolve this dispute at mediation rather than face these claims in litigation.

A. Chapter 541 — Unfair Settlement Practices

Texas Insurance Code Chapter 541 prohibits unfair methods of competition and unfair or deceptive acts and practices in the business of insurance. Section 541.060 specifically addresses unfair settlement practices and provides, among other things, that it is an unfair settlement practice for an insurer to:

• Fail 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)(2)(i));

• Deny a claim without conducting a reasonable investigation (§ 541.060(a)(7)); and

• Refuse to pay a claim without conducting a reasonable investigation with respect to the claim (§ 541.060(a)(3)).

Meridian's conduct in handling SLG's claim raises serious bad-faith concerns under Chapter 541. Most notably:

First, Exclusion 4(f) — the "Improper Storage" exclusion — was raised for the first time in Meridian's January 22, 2024 denial letter, without having been identified in the December 4, 2023 Reservation of Rights letter. A Reservation of Rights letter serves the critical function of identifying all potential grounds for denial so that the policyholder can respond to them during the investigation period. The belated invocation of Exclusion 4(f) — nearly two months after the Reservation of Rights letter and only in the denial letter itself — strongly suggests that this exclusion was asserted without adequate investigation and may have been raised as a post hoc justification to bolster a denial that was already predetermined. This conduct is precisely the type of claims-handling practice that Chapter 541 is designed to address.

Second, the factual bases for both Exclusion 4(f) and Exclusion 4(k) are demonstrably unsupported. As detailed at length in Section VI above, SLG's storage practices were fully compliant with shipper instructions and applicable industry standards, and the alleged sprinkler maintenance gap did not cause or contribute to the loss. Meridian's assertion of these exclusions on the basis of factually unsupported allegations — particularly where independent forensic evidence contradicts those allegations — constitutes a failure to conduct a reasonable investigation and a refusal to pay a claim that the insurer's liability has become reasonably clear.

The remedies available under Chapter 541 are substantial. A policyholder who establishes a violation of Chapter 541 is entitled to recover actual damages, and the court may award additional damages not to exceed three times the amount of actual damages — i.e., treble damages. See Tex. Ins. Code § 541.152(b). Additionally, a prevailing policyholder is entitled to recover reasonable and necessary attorney's fees. See Tex. Ins. Code § 541.152(a)(1).

SLG, through undersigned counsel, sent a pre-suit statutory notice to Meridian pursuant to Texas Insurance Code § 541.154 on July 1, 2024. This statutory notice initiates the sixty-day cure period prescribed by § 541.154, which runs through approximately August 30, 2024. If Meridian does not resolve this claim within the cure period, SLG will be entitled to pursue its Chapter 541 claims in litigation.

B. Chapter 542 — Prompt Payment of Claims

Texas Insurance Code Chapter 542, Subchapter B — commonly known as the "Prompt Payment of Claims Act" — imposes strict deadlines on insurers for acknowledging, investigating, and paying claims. When an insurer fails to comply with these deadlines, § 542.060 provides that the insurer is liable for the amount of the claim, plus eighteen percent (18%) per annum interest on the amount of the claim as damages, calculated from the date the claim was required to be paid, together with reasonable and necessary attorney's fees.

The penalty interest calculation in this case is as follows:

SLG submitted its sworn proof of loss to Meridian on February 1, 2024. Under § 542.058, the insurer must pay a claim not later than the fifth business day after the date the insurer notifies the claimant that the claim is accepted, or — if the insurer does not notify the claimant — not later than the sixtieth day after the insurer receives all items, statements, and forms reasonably requested and required. Under § 542.060, penalty interest begins to accrue on the date the claim should have been paid.

Calculating sixty-one business days from February 1, 2024 — the date Meridian received SLG's sworn proof of loss and all supporting documentation — yields an approximate interest accrual start date of April 29, 2024.

As of the scheduled mediation date of June 20, 2024, penalty interest has been accruing for approximately 52 days. Projected through August 2024, the penalty interest calculation is as follows:

It is critical for Meridian to understand that these statutory damages continue to accrue with each passing day. The longer Meridian delays resolution of this claim, the greater its financial exposure becomes. The 18% per annum penalty interest rate is punitive by design and serves as a powerful legislative incentive for insurers to pay valid claims promptly.

C. Total Exposure for Meridian

The following table summarizes Meridian's total financial exposure in the event this matter proceeds to litigation:

Meridian's total potential exposure in litigation substantially exceeds the policy limits. The statutory framework under the Texas Insurance Code is designed to ensure that insurers who wrongfully deny valid claims face consequences that are proportionate to the harm inflicted on policyholders. The exposure Meridian faces here — particularly the prospect of treble damages under Chapter 541 — should serve as a powerful incentive for Meridian to resolve this matter at mediation on terms that reflect the merits of SLG's position.

VIII. HISTORY OF SETTLEMENT NEGOTIATIONS

The parties have engaged in the following pre-mediation settlement communications:

April 12, 2024: Calderwood & Harkness, on behalf of SLG, sent a formal demand letter to Meridian (addressed to Patricia Ng, Vice President of Claims), with a copy to Kessler, Brandt & Howe LLP. The demand letter sought payment of $4,530,000, representing the full indemnity amount net of the SIR, together with all applicable remedies under Texas Insurance Code Chapters 541 and 542. The letter set a thirty-day response deadline. The demand letter detailed SLG's coverage position, summarized the findings of the Ridgeline forensic report, and outlined Meridian's statutory exposure.

May 6, 2024: Meridian, through KBH, responded to the demand letter with a written offer of $1,750,000, characterized as a "compromise" payment. This offer represented less than 39% of SLG's net claim amount. The offer letter did not meaningfully engage with SLG's factual and legal arguments regarding the inapplicability of the invoked exclusions, nor did it provide any revised factual basis for Meridian's denial. The offer was accompanied by a general release that would have required SLG to waive all statutory claims under the Texas Insurance Code.

May 10, 2024: SLG, through Calderwood & Harkness, rejected Meridian's offer as wholly inadequate. SLG's response letter reiterated the merits of SLG's coverage position, noted the continued accrual of penalty interest under § 542.060, and proposed that the parties submit the dispute to mediation at JAMS Houston in an effort to reach a fair resolution before litigation.

May 14, 2024: Meridian, through KBH, agreed to participate in mediation at JAMS Houston. The parties subsequently agreed on the selection of Hon. Margaret Colquitt (Ret.) as mediator, and the mediation session was scheduled for June 20, 2024.

The significant gap between Meridian's offer of $1,750,000 and SLG's demand of $4,530,000 (plus statutory remedies) reflects Meridian's unreasonable valuation of its exclusion defenses. As demonstrated throughout this Position Statement, neither Exclusion 4(f) nor Exclusion 4(k) has a viable factual or legal basis. Meridian's offer appears to apply a substantial discount for litigation risk that is not warranted by the actual risk Meridian faces. If anything, the litigation risk in this case is overwhelmingly weighted against Meridian, given the strength of SLG's coverage position and Meridian's substantial statutory exposure.

SLG approaches this mediation with the expectation that the Mediator will assist the parties in reaching a resolution that reflects the true merits of the dispute and the realistic litigation exposure Meridian faces.

IX. SLG'S SETTLEMENT DEMAND

SLG demands payment of $4,530,000, representing the full indemnity amount due under Policy No. IML-TX-0039821-2023, calculated as the total documented cargo loss of $4,780,000, less the $250,000 per-occurrence self-insured retention.

In addition to the indemnity amount, SLG seeks reimbursement of all accrued penalty interest under Texas Insurance Code Chapter 542, § 542.060, calculated at the statutory rate of 18% per annum from the approximate accrual date of April 29, 2024, through the date of payment. As noted above, this amount is approximately $250,128 through August 2024 and continues to grow with each passing day.

SLG reserves all rights under Texas Insurance Code Chapter 541, including the right to seek treble damages (up to three times actual damages) and reasonable and necessary attorney's fees. SLG has already sent the pre-suit statutory notice required by § 541.154, and the sixty-day cure period is running.

SLG is willing to engage in good-faith negotiations at mediation and acknowledges that mediation often requires both sides to exercise flexibility. However, SLG must be candid: any resolution of this dispute must reflect the overwhelming strength of SLG's coverage position and the legal and financial risks that Meridian faces in litigation. A settlement that does not meaningfully account for these realities would not be in SLG's interest, and SLG is prepared to pursue its claims through litigation if a fair resolution cannot be achieved at mediation.

X. CONCLUSION

The facts and law in this matter strongly favor Stonefield Logistics Group Inc. The core elements of this dispute can be summarized as follows:

The November 17, 2023 fire at Warehouse Building C was an accidental, electrical-origin event — a fortuitous loss that falls squarely within the broad all-risk coverage grant of SLG's Inland Marine Cargo Legal Liability Policy. The fire destroyed $4,780,000 in customer cargo that was in SLG's care, custody, and control. SLG promptly notified Meridian, timely submitted a comprehensive sworn proof of loss, and satisfied all procedural conditions precedent to coverage.

Neither of the exclusions Meridian has invoked — Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain) — applies as a matter of fact or law. SLG's cargo storage practices were fully compliant with shipper instructions and applicable industry standards. The alleged sprinkler maintenance gap did not cause or contribute to the loss. The independent forensic investigation conducted by Ridgeline Forensic Consultants LLC confirms both of these conclusions. Meridian bears the burden of proving the applicability of these exclusions, and it cannot carry that burden.

Meridian's denial was wrongful and exposes Meridian to substantial statutory liability under the Texas Insurance Code, including 18% per annum penalty interest under Chapter 542 (accruing daily), potential treble damages under Chapter 541, and reasonable and necessary attorney's fees. Meridian's total potential exposure in litigation substantially exceeds the policy limits.

SLG has incurred significant legal fees and forensic investigation costs in prosecuting this claim and has been deprived of the indemnification to which it is entitled for nearly seven months. During this time, SLG has been required to address and manage claims from the cargo owners whose freight was destroyed — claims that the Meridian Policy was specifically designed to protect against. The financial and operational burden of Meridian's wrongful denial has been substantial.

SLG urges the Mediator to assist the parties in reaching a resolution that reflects the merits of SLG's position and avoids the additional costs, delay, and uncertainty of litigation for both sides. SLG believes that a fair and prompt resolution is in the interest of both parties, but any such resolution must be grounded in a realistic assessment of the factual record and the legal landscape.

SLG respectfully requests the opportunity to present additional information during the mediation session on June 20, 2024, including the Ridgeline forensic report, the Whitlock proof of loss and supporting documentation, the Warehouse Layout Plan Rev. 7, the Lone Star Fire Protection engagement letter, and SLG's sprinkler inspection records. SLG's counsel and representatives are prepared to address any questions the Mediator may have and to engage in constructive dialogue with Meridian in pursuit of a fair outcome.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Bellamy Responsible Partner

By: ________

Andrew Fitzpatrick Lead Associate

700 Louisiana Street, Suite 4500 Houston, TX 77002 Telephone: (713) 555-4100 Facsimile: (713) 555-4101

Counsel for Stonefield Logistics Group Inc.

Date: June 17, 2024

CERTIFICATE OF DELIVERY

The undersigned hereby certifies that a copy of the foregoing Confidential Mediation Position Statement of Stonefield Logistics Group Inc. was delivered to Hon. Margaret Colquitt (Ret.), Mediator, JAMS Houston, on June 17, 2024, in accordance with the JAMS Mediation Rules.

Pursuant to the JAMS Mediation Rules and the parties' agreement regarding the confidentiality of mediator's-eyes-only submissions, this Confidential Mediation Position Statement has not been served upon or delivered to opposing counsel, Kessler, Brandt & Howe LLP, or to Meridian Surety & Indemnity Company. A separate summary (non-confidential) mediation brief may be prepared and shared with Kessler, Brandt & Howe LLP if directed by the Mediator in advance of or during the mediation session.

By: ________

Howard Bellamy Responsible Partner Calderwood & Harkness LLP

Date: June 17, 2024

Cargo Description	Shipper/Owner	Quantity	Value
5-1/2" P-110 casing pipe	Permian Wellhead Services LLC	312 joints	$1,842,000
Completion chemicals	Cantera Chemical Supply Co.	47 pallets	$1,126,500
Downhole tools and sensors	Triton Subsurface Technologies Inc.	18 crates	$987,000
Miscellaneous freight	Multiple shippers	Various	$824,500
TOTAL CARGO LOSS	$4,780,000
Item	Amount
Total documented cargo loss	$4,780,000
Less: Self-insured retention (SIR) per occurrence	($250,000)
Net claim amount	$4,530,000
Policy Element	Detail
Policy Number	IML-TX-0039821-2023
Named Insured	Stonefield Logistics Group Inc.
Policy Period	April 1, 2023 – March 31, 2024
Type of Coverage	Inland Marine Cargo Legal Liability
Per-Occurrence Limit	$5,000,000
Annual Aggregate Limit	$10,000,000
Self-Insured Retention	$250,000 each occurrence
Annual Premium	$174,600
Issuing Insurer	Meridian Surety & Indemnity Company
NAIC No.	28471
A.M. Best Rating	A (Excellent), FSC IX
Component	Calculation
Net claim amount	$4,530,000
Penalty interest rate	18% per annum

Accrual period (through August 2024, approx.)	112 days
Projected penalty interest	$4,530,000 × 0.18 × (112 / 365) ≈ $250,128
Component	Amount
Indemnity (net of SIR)	$4,530,000
Penalty interest under § 542.060 (accruing)	~$250,128 (through August 2024, and growing)
Treble damages under Chapter 541 (up to 3× actual damages)	Up to $13,590,000
Attorney's fees (SLG's reasonable and necessary fees)	To be determined
Total potential exposure	Substantially exceeds policy limits

CONFIDENTIAL MEDIATION POSITION STATEMENT OF STONEFIELD LOGISTICS GROUP INC.
Submitted to: Hon. Margaret Colquitt (Ret.), Mediator JAMS Houston
JAMS Case No.: 1440-02917-2024
Date of Submission: June 17, 2024
Date of Mediation Session: June 20, 2024
Prepared by:
Howard Bellamy, Responsible Partner Andrew Fitzpatrick, Lead Associate CALDERWOOD & HARKNESS LLP 700 Louisiana Street, Suite 4500 Houston, TX 77002 Telephone: (713) 555-4100 Facsimile: (713) 555-4101
On Behalf of:
STONEFIELD LOGISTICS GROUP INC. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701
Opposing Party:
MERIDIAN SURETY & INDEMNITY COMPANY 600 Scioto Crossing, Suite 1200 Columbus, OH 43215
Opposing Counsel:
Victoria Kessler, Lead Partner Samuel Okonkwo, Associate KESSLER, BRANDT & HOWE LLP 1401 McKinney Street, Suite 2800 Houston, TX 77010
CONFIDENTIALITY NOTICE: This Mediation Position Statement is submitted pursuant to the JAMS Mediation Rules and is intended solely for the use of the Mediator. This statement and its contents are confidential, privileged, and inadmissible in any subsequent proceeding pursuant to Tex. Civ. Prac. & Rem. Code § 154.073. No portion of this statement may be disclosed, reproduced, or distributed to any party, counsel, or third person without the prior written consent of Stonefield Logistics Group Inc. and its counsel.
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I. INTRODUCTION AND SUMMARY OF DISPUTE
Stonefield Logistics Group Inc. ("SLG" or the "Company") respectfully submits this Confidential Mediation Position Statement to Hon. Margaret Colquitt (Ret.) in advance of the mediation session scheduled for June 20, 2024, at JAMS Houston. SLG approaches this mediation in good faith and with a genuine desire to resolve this dispute, but is simultaneously prepared to pursue its claims through litigation in Midland County, Texas if a fair resolution cannot be achieved.
SLG is a Texas-based intermodal freight brokerage, trucking, and transload/warehousing company headquartered in Midland, Texas. The Company operates fourteen terminals across Texas, New Mexico, and Oklahoma, specializing in Permian Basin oilfield supply-chain logistics. SLG handles a wide range of oilfield freight, including casing pipe, proppant, completion chemicals, and heavy equipment, providing critical logistics infrastructure for some of the most active oil and gas production operations in the United States. SLG is a portfolio company of Irongate Capital Partners, LP, which acquired a 72% equity interest in SLG in August 2019 through Irongate Industrial Partners Fund IV, LP. In fiscal year 2023, SLG generated revenue of approximately $187.4 million and EBITDA of approximately $29.1 million, employing approximately 1,100 people across its operations.
On November 17, 2023, a catastrophic warehouse fire struck SLG's Midland Facility — specifically, Warehouse Building C, located at 4501 East County Road 130, Midland, TX 79706. The fire, which originated from an electrical fault in the building's main distribution panel, destroyed approximately $4.78 million in customer freight that was in SLG's care, custody, and control at the time of the loss. The fire was an accidental, electrical-origin event — precisely the type of fortuitous loss covered under SLG's all-risk Inland Marine Cargo Legal Liability Policy.
SLG holds an all-risk Inland Marine Cargo Legal Liability Policy, Policy No. IML-TX-0039821-2023, issued by Meridian Surety & Indemnity Company ("Meridian"). Meridian is an Ohio-domiciled stock insurance company (NAIC No. 28471), carrying an A.M. Best Rating of A (Excellent), Financial Size Category IX. The Policy provides a per-occurrence limit of $5,000,000 and an annual aggregate limit of $10,000,000, subject to a $250,000 self-insured retention ("SIR") per occurrence. The annual premium for the Policy is $174,600, and the policy period runs from April 1, 2023 through March 31, 2024. The loss at issue falls squarely within the policy period.
Despite the clarity of coverage, Meridian formally denied SLG's claim on January 22, 2024. In its denial letter, Meridian invoked two policy exclusions: Exclusion 4(f), the "Improper Storage" exclusion, and Exclusion 4(k), the "Failure to Maintain" exclusion. As detailed at length in this Position Statement, both exclusions are inapplicable as a matter of fact and law. The factual predicates Meridian has asserted in support of these exclusions are demonstrably incorrect, and the legal standards governing the application of exclusions under Texas law foreclose Meridian's position. Meridian's wrongful denial exposes it to substantial statutory liability under the Texas Insurance Code, including penalty interest under Chapter 542 and potential treble damages and attorney's fees under Chapter 541.
SLG's net claim under the Policy — total cargo loss of $4,780,000, less the $250,000 SIR — amounts to $4,530,000. This amount is well within the $5,000,000 per-occurrence limit, and no prior claims have been made under the Policy during the current policy period, meaning the $10,000,000 annual aggregate limit is not implicated.
On April 12, 2024, SLG, through undersigned counsel, submitted a formal demand letter to Meridian demanding payment of the full $4,530,000 indemnity amount, together with statutory penalties and remedies under the Texas Insurance Code. On May 6, 2024, Meridian, through its coverage counsel at Kessler, Brandt & Howe LLP, responded with a "compromise" offer of only $1,750,000 — less than 39% of the net claim amount. SLG rejected this offer as wholly inadequate given the overwhelming strength of SLG's coverage position and the absence of any meritorious basis for the invoked exclusions.
SLG brings this matter to mediation in good faith and with a sincere hope that a fair resolution can be reached. However, SLG must be candid with the Mediator: if Meridian does not substantially revise its position and agree to a settlement that reflects the merits of SLG's claim, SLG is fully prepared to file suit in Midland County, Texas, seeking not only the indemnity amount but the full panoply of statutory remedies available under the Texas Insurance Code, including penalty interest, treble damages, and attorney's fees.
II. THE PARTIES
A. Stonefield Logistics Group Inc.
Stonefield Logistics Group Inc. is a Texas corporation with Federal Employer Identification Number 84-3291057. Its principal office and headquarters are located at 2900 Petroleum Tower Boulevard, Suite 400, Midland, TX 79701. The Company's registered agent is CT Statutory Services, Inc., 1999 Bryan Street, Suite 900, Dallas, TX 75201.
SLG was founded in 1987 and has grown into a mid-market intermodal freight brokerage, trucking, and transload/warehousing company that serves as a critical link in the Permian Basin oilfield supply chain. The Company handles a diverse range of oilfield freight, including casing pipe, proppant, completion chemicals, downhole tools, and heavy equipment. SLG operates fourteen terminals strategically located across Texas, New Mexico, and Oklahoma, enabling it to provide comprehensive logistics services to upstream and midstream operators throughout the Permian Basin.
SLG's current senior leadership includes Marcus D. Stonefield, the Company's Chief Executive Officer and the founder's grandson, who has led the Company since 2015. The Company's Chief Financial Officer is Leah Tran, and its Vice President of Risk Management is Dale Engstrom. Mr. Engstrom has been instrumental in managing the Company's insurance program and overseeing the claim submission process that is the subject of this dispute.
In August 2019, Irongate Capital Partners, LP acquired a 72% equity interest in SLG through Irongate Industrial Partners Fund IV, LP. The Irongate acquisition brought additional capital and operational resources to SLG, enabling the Company to expand its terminal network and invest in facility improvements, including upgrades to warehouse safety systems. In fiscal year 2023, SLG generated revenue of approximately $187.4 million and EBITDA of approximately $29.1 million, and the Company employed approximately 1,100 people.
B. Meridian Surety & Indemnity Company
Meridian Surety & Indemnity Company is an Ohio-domiciled stock insurance company with its principal office at 600 Scioto Crossing, Suite 1200, Columbus, OH 43215. Meridian's NAIC number is 28471, and it carries an A.M. Best Rating of A (Excellent), Financial Size Category IX. Meridian is a well-capitalized specialty insurer that writes inland marine, surety, and commercial lines coverage across multiple states, including Texas.
The Meridian claims personnel primarily responsible for handling SLG's claim include Patricia Ng, Vice President of Claims and the handling adjuster assigned to the file, and Brian Woolf, Senior Claims Examiner. Meridian's coverage counsel in this matter is the law firm of Kessler, Brandt & Howe LLP ("KBH"), with lead partner Victoria Kessler and associate Samuel Okonkwo serving as Meridian's counsel of record. KBH's offices are located at 1401 McKinney Street, Suite 2800, Houston, TX 77010.
C. SLG's Counsel
SLG is represented in this matter by Calderwood & Harkness LLP, 700 Louisiana Street, Suite 4500, Houston, TX 77002. The responsible partner is Howard Bellamy, and the lead associate is Andrew Fitzpatrick. Calderwood & Harkness is a full-service law firm with deep experience in insurance coverage litigation, first-party property and marine insurance claims, and Texas Insurance Code bad-faith actions.
D. SLG's Insurance Broker
SLG's Inland Marine Cargo Legal Liability Policy was placed by Calvert & Strauss Insurance Brokers, Inc., 3700 Buffalo Speedway, Suite 520, Houston, TX 77098. The account executive responsible for SLG's account is Jason Muñoz. Calvert & Strauss assisted SLG with the initial submission of the claim to Meridian following the November 17, 2023 fire, including providing prompt written notice of the loss event as required under the Policy.
III. THE LOSS EVENT — NOVEMBER 17, 2023 FIRE
A. Factual Summary
On November 17, 2023, at approximately 2:14 a.m. CST, a fire broke out in Warehouse Building C at SLG's Midland Facility, located at 4501 East County Road 130, Midland, TX 79706. Warehouse Building C is a 42,000-square-foot steel-frame warehouse facility used by SLG for the storage of customer freight, including casing pipe, completion chemicals, downhole tools, and miscellaneous oilfield supply-chain materials. The building was constructed in 2011 and was equipped with modern fire-protection systems at the time of its original construction.
The fire originated in the Building C main electrical distribution panel — a Square D Model QED-2 electrical panel that had been installed in 2011 as part of the building's original construction. The cause of the fire was electrical arcing within the distribution panel. The arcing ignited adjacent combustible packaging materials that were stored in the immediate vicinity of the panel, and the fire then spread rapidly throughout the warehouse.
Warehouse Building C was equipped with a wet-pipe automatic sprinkler system that was compliant with NFPA 13 (Standard for the Installation of Sprinkler Systems) at the time of its installation in 2011. The sprinkler system did activate in response to the fire. However, the system's suppression capability was significantly limited on the night of the fire because the municipal water-supply pressure feeding the sprinkler system was only 36 psi actual, compared to the 52 psi design parameter that the system required for full operational effectiveness. This 31% deficit in water-supply pressure — a condition entirely outside SLG's control and attributable to the municipal water authority — substantially undermined the sprinkler system's ability to suppress the fire, regardless of the system's maintenance status.
The Midland Fire Department received the alarm and responded promptly, arriving at the scene at approximately 2:31 a.m. CST — approximately seventeen minutes after the fire's ignition. Despite the Fire Department's efforts, the fire was not fully contained until approximately 4:45 a.m. CST, more than two and a half hours after it began. By that time, substantial damage had been done to both the building structure and the customer freight stored inside.
Warehouse Building C was ultimately declared a total structural loss. The building damage, estimated at $1,350,000, is covered under a separate commercial property insurance policy and is not at issue in this dispute. The dispute before this Mediator concerns exclusively the destruction of customer cargo that was in SLG's care, custody, and control at the time of the fire — cargo with a total documented value of $4,780,000.
B. Independent Forensic Investigation — Ridgeline Forensic Consultants LLC
Following Meridian's issuance of a Reservation of Rights letter on December 4, 2023, and in anticipation of a potential coverage dispute, Calderwood & Harkness retained Ridgeline Forensic Consultants LLC on February 12, 2024, on behalf of SLG, to conduct an independent origin-and-cause investigation of the Warehouse Building C fire. Ridgeline Forensic Consultants LLC is a nationally recognized forensic engineering firm specializing in fire-origin-and-cause investigation, electrical failure analysis, and fire-suppression system evaluation. The lead investigator assigned to the engagement was Dr. William Creech, P.E., CFEI, whose offices are located at 9100 Sovereign Row, Suite 210, Dallas, TX 75247. Dr. Creech holds both a Professional Engineering license and a Certified Fire and Explosion Investigator credential, and he has more than twenty-five years of experience conducting fire-origin-and-cause investigations for insurance carriers, policyholders, and government agencies.
The Ridgeline forensic report was completed and delivered on March 15, 2024. The report reflects an exhaustive investigation, including physical examination of the fire scene, analysis of the electrical distribution panel remnants, review of fire department records and incident reports, interviews with SLG personnel, analysis of the sprinkler system components and water-supply data, and review of SLG's warehouse layout documentation. The key findings of the Ridgeline report are as follows:
1.  Fire Origin and Cause. The fire originated in the Square D Model QED-2 main electrical distribution panel located in Warehouse Building C. The cause of the fire was electrical arcing within the panel. The arcing was attributable to age-related degradation of internal bus bar connections and was not caused by any external factor, act, or omission of SLG.
2.  No Causal Relationship to Storage Practices or Sprinkler Maintenance. The fire was not caused by any act or omission of SLG related to cargo storage practices or sprinkler system maintenance. The fire originated in the electrical panel, not in any stored cargo or fire-suppression component. SLG's storage practices and sprinkler maintenance status were irrelevant to the fire's origin.
3.  Municipal Water-Supply Pressure Deficit. Even a fully code-compliant sprinkler system operating at its design pressure of 52 psi would not have prevented the loss, given the documented municipal water-supply pressure deficit on the night of the fire. The actual municipal water-supply pressure feeding the Warehouse Building C sprinkler system was only 36 psi — a 31% deficit from the system's design parameter. This pressure deficit was attributable to the municipal water authority and was entirely outside SLG's control.
4.  Cargo Segregation Confirmed. Post-fire forensic mapping of the warehouse debris field confirmed that SLG's cargo segregation layout, as documented in SLG's Warehouse Layout Plan Rev. 7 (dated June 2023), was maintained at the time of the fire. Specifically, pipe storage was confined to Bays 1 through 4, chemical pallets were confined to Bays 9 through 12, and a 40-foot buffer zone consisting of Bays 5 through 8 (used for tools and equipment) separated the pipe and chemical storage areas.
SLG intends to make the full Ridgeline forensic report available to the Mediator during the mediation session, and SLG is confident that the report's findings comprehensively rebut both of the exclusions Meridian has invoked.
IV. CARGO LOSS AND QUANTIFICATION
A. Destroyed Cargo — Itemized
The fire at Warehouse Building C destroyed customer freight belonging to multiple shippers. The following table sets forth the itemized cargo losses, each of which has been documented and verified through SLG's warehouse management system records, bills of lading, shipper invoices, and the sworn proof of loss prepared by Whitlock & Associates, Certified Public Accountants, P.C.:
The valuations reflected in the table above are based on the replacement cost of the destroyed freight, as determined through review of shipper invoices, purchase orders, and market pricing data. Each shipper has confirmed the value of its destroyed cargo, and those confirmations are reflected in the supporting documentation accompanying the sworn proof of loss.
B. Proof of Loss
SLG engaged Whitlock & Associates, Certified Public Accountants, P.C. to prepare a sworn proof of loss in accordance with Policy Section 8(c). Whitlock & Associates is a Midland-based CPA firm with deep experience in insurance loss quantification, particularly in the oilfield services sector. The engagement partner was Sandra Whitlock, CPA, CFF, whose offices are located at 4200 South Loop 250 West, Suite 100, Midland, TX 79703. Ms. Whitlock holds both the Certified Public Accountant and Certified in Financial Forensics credentials and has prepared sworn proofs of loss in numerous insurance claims involving commercial property and cargo losses.
The sworn proof of loss was submitted to Meridian on February 1, 2024. This submission was well within the 90-day proof-of-loss period required by Policy Section 8(c). The loss occurred on November 17, 2023, and 90 days from that date falls on approximately February 15, 2024. SLG's submission on February 1, 2024, was therefore made with two weeks to spare. The sworn proof of loss was accompanied by extensive supporting documentation, including warehouse management system records, bills of lading, shipper invoices, purchase orders, shipper confirmation letters, and the Whitlock firm's independent valuation analysis.
C. Net Claim Calculation
The net claim amount payable under the Policy is calculated as follows:
The net claim amount of $4,530,000 is well within the Policy's per-occurrence limit of $5,000,000. No prior claims have been submitted under the Policy during the current policy period (April 1, 2023 through March 31, 2024), and accordingly the $10,000,000 annual aggregate limit is not implicated. There is no colorable argument that the Policy's limits are insufficient to pay SLG's claim in full.
V. THE MERIDIAN POLICY — COVERAGE GRANT AND KEY TERMS
A. Policy Identification
The key terms of the Meridian Policy are set forth below for the Mediator's reference:
The Policy was placed by SLG's insurance broker, Calvert & Strauss Insurance Brokers, Inc. (Account Executive: Jason Muñoz), and was bound effective April 1, 2023. The Policy has been continuously in force throughout the policy period, and all premiums have been paid in full and on time. SLG has been in full compliance with all policy conditions.
B. Coverage Grant
The Policy's insuring agreement provides coverage for:
"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…"
This is a broad, all-risk coverage grant. Under well-settled Texas law, an all-risk policy covers all fortuitous losses unless specifically excluded. See Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex. 2006) ("An all-risk policy insures against all risks of physical loss except those that are specifically excluded."). The insured's burden under an all-risk policy is simply to demonstrate that a covered loss occurred; the burden then shifts to the insurer to prove the applicability of any exclusion. See Nat'l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 556 (Tex. 1991).
The fire at Warehouse Building C on November 17, 2023, and the resulting destruction of customer cargo, constitutes a "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 … warehousing … operations." This is precisely the type of loss the Policy was designed to cover, and the loss falls squarely within the coverage grant. Meridian does not appear to dispute that the loss, in the absence of an applicable exclusion, would be covered. The entire dispute turns on whether Meridian can establish the applicability of one or both of the two exclusions it has invoked. As demonstrated below, it cannot.
C. Notice and Proof-of-Loss Compliance
SLG has satisfied all procedural requirements under the Policy:
Notice of Loss (Policy Section 8(a)). Section 8(a) of the Policy requires the insured to provide written notice to the insurer within thirty days of the loss event. SLG provided timely notice of the November 17, 2023 fire through its insurance broker, Calvert & Strauss. Written notice was transmitted to Meridian promptly following the fire. Meridian does not dispute the timeliness of SLG's notice.
Sworn Proof of Loss (Policy Section 8(c)). Section 8(c) of the Policy requires the insured to submit a sworn proof of loss within ninety days of the loss event. SLG, through Whitlock & Associates, submitted a comprehensive sworn proof of loss to Meridian on February 1, 2024 — well within the ninety-day period, which expired on approximately February 15, 2024. Meridian does not dispute the timeliness or sufficiency of SLG's proof of loss.
All procedural conditions precedent to coverage have been satisfied. There are no outstanding procedural defenses available to Meridian.
VI. MERIDIAN'S DENIAL AND ITS DEFICIENCIES
A. Procedural History of the Claim
The procedural history of Meridian's handling of this claim is both illuminating and troubling. The key dates are as follows:
•  November 17, 2023: The fire occurs at Warehouse Building C. SLG provides prompt notice to Meridian through its broker, Calvert & Strauss.
•  December 4, 2023: Meridian issues a Reservation of Rights letter, seventeen days after receiving notice of the loss. Critically, this letter cited only Exclusion 4(k) — the "Failure to Maintain" exclusion. Exclusion 4(f) — the "Improper Storage" exclusion — was not mentioned in the Reservation of Rights letter.
•  February 1, 2024: SLG submits its sworn proof of loss, prepared by Whitlock & Associates, to Meridian.
•  January 22, 2024: Meridian issues its formal denial letter. For the first time, Meridian invokes both Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain) as grounds for denial.
There is a critical procedural deficiency in Meridian's claims handling that the Mediator should note: Exclusion 4(f) — the "Improper Storage" exclusion — was raised for the first time in Meridian's January 22, 2024 denial letter, more than two months after the Reservation of Rights letter was issued. This exclusion was not identified in the December 4, 2023 Reservation of Rights letter, despite Meridian's obligation to identify all potential grounds for denial at the reservation stage. The belated assertion of Exclusion 4(f) raises serious questions about whether Meridian conducted an adequate investigation before denying the claim and whether the invocation of this exclusion was a post hoc rationalization designed to bolster a weak denial. This procedural irregularity is relevant to SLG's bad-faith claims under Texas Insurance Code § 541.060, as discussed in Section VII below.
B. Exclusion 4(f) — "Improper Storage"
Policy Language. Exclusion 4(f) of the Policy provides as follows:
"This Policy does not apply to 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…"
Meridian's Allegation. In its January 22, 2024 denial letter, Meridian alleged that SLG stored casing pipe and completion chemicals in the same warehouse bay, in violation of the shipper's written storage instructions and in violation of OSHA segregation requirements set forth in 29 CFR § 1910.106. According to Meridian, this co-storage of incompatible materials constituted "improper storage" within the meaning of Exclusion 4(f) and resulted in the cargo loss.
Why Exclusion 4(f) Does Not Apply. Meridian's position is factually baseless and legally untenable for the following reasons:
First, SLG did not store casing pipe and completion chemicals in the same warehouse bay. SLG's Warehouse Layout Plan Rev. 7, dated June 2023, establishes a clear and well-documented segregation protocol for Warehouse Building C. Under this layout plan, pipe storage was confined to Bays 1 through 4 on the north side of the warehouse. Chemical pallets were confined to Bays 9 through 12 on the south side of the warehouse. Bays 5 through 8, in the center of the warehouse, were designated for tools and equipment storage, creating a 40-foot buffer zone between the pipe and chemical storage areas. This layout plan was in effect at the time of the fire and was being followed by SLG's warehouse personnel.
Second, the Ridgeline forensic report independently confirmed that SLG's cargo segregation layout was maintained at the time of the fire. Dr. Creech and his team conducted detailed post-fire forensic mapping of the warehouse debris field, correlating the locations of burned and damaged cargo remnants with the pre-fire layout plan. This mapping confirmed that pipe materials and chemical pallets were in their designated bays and were not co-mingled. Meridian's factual assertion to the contrary is simply wrong.
Third, even if pipe and chemicals had been stored in closer proximity than the layout plan dictated — which they were not — the shipper's written storage instructions do not support Meridian's position. The storage instructions provided by Cantera Chemical Supply Co. for its completion chemicals required "segregation from incompatible materials per SDS" (Safety Data Sheet). The Cantera chemicals are classified as Class IIIB combustible liquids, with a flash point above 200°F. Casing pipe is inert steel — it is not an "incompatible material" with respect to Class IIIB combustible liquids under any reasonable interpretation of the shipper's instructions or the relevant Safety Data Sheets.
Fourth, Meridian's reliance on OSHA 29 CFR § 1910.106 is misplaced as a matter of regulatory applicability. Section 1910.106 governs the storage and handling of flammable and combustible liquids. Its segregation requirements apply to liquids classified as Class I (flammable), Class II (combustible, flash point 100°F–140°F), and Class IIIA (combustible, flash point 140°F–200°F). Class IIIB combustible liquids — those with flash points at or above 200°F, which is the classification of the Cantera chemicals — are expressly excluded from the scope of § 1910.106's most stringent segregation and storage requirements. Meridian's citation to this regulation demonstrates either a fundamental misunderstanding of the applicable regulatory framework or a willful mischaracterization of it.
Fifth, even assuming arguendo that there was some technical deviation from storage protocols — which SLG categorically denies — the Exclusion 4(f) language requires that the loss "result from" the improper storage. The fire originated in the electrical distribution panel. It did not originate in, and was not caused by, any aspect of cargo storage or cargo segregation. The location of the cargo within the warehouse was irrelevant to the fire's ignition and initial spread. Meridian cannot establish the required causal nexus between the alleged improper storage and the loss.
In sum, Exclusion 4(f) does not apply because: (a) SLG's storage practices were entirely consistent with the shipper's written instructions and applicable industry standards; (b) the Ridgeline forensic investigation confirmed compliance; (c) the OSHA regulation Meridian cites does not apply to the chemicals at issue; and (d) Meridian cannot establish any causal relationship between SLG's storage practices and the fire loss. Meridian bears the burden of proving the applicability of this exclusion, and it cannot carry that burden on these facts.
C. Exclusion 4(k) — "Failure to Maintain"
Policy Language. Exclusion 4(k) of the Policy provides as follows:
"This Policy does not apply to 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…"
Meridian's Allegation. 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 Warehouse Building C sprinkler system in accordance with NFPA 25 (Standard for the Inspection, Testing, and Maintenance of Water-Based Fire Protection Systems). Specifically, Meridian asserted that the last annual full-flow inspection of the sprinkler system was performed on September 14, 2022, and that the system should have been re-inspected by September 14, 2023, pursuant to NFPA 25. Because the fire occurred on November 17, 2023 — approximately two months after the annual inspection was purportedly due — Meridian contends that SLG failed to maintain the sprinkler system and that this failure triggered Exclusion 4(k).
Why Exclusion 4(k) Does Not Apply. Meridian's reliance on Exclusion 4(k) fails for three independent reasons, any one of which is dispositive.
1. SLG's Maintenance Record Demonstrates Diligent Compliance.  SLG maintained the Warehouse Building C sprinkler system diligently and in substantial compliance with NFPA 25. SLG conducted all required quarterly visual inspections of the sprinkler system in accordance with NFPA 25 § 5.2.1. The quarterly inspections were performed on the following dates:
•  December 15, 2022
•  March 20, 2023
•  June 12, 2023
•  September 8, 2023
Each of these quarterly inspections was documented in SLG's fire-protection system maintenance records, which are available for the Mediator's review.
With respect to the annual full-flow test required by NFPA 25 § 5.3.2, SLG acknowledges that the last annual full-flow test was performed on September 14, 2022, and that the next annual full-flow test was due on or about September 14, 2023. SLG does not dispute that the annual full-flow test had not been performed as of the date of the fire on November 17, 2023. However, the circumstances surrounding this scheduling gap demonstrate the absence of any negligence or willful inaction on SLG's part.
SLG's fire-protection contractor, Lone Star Fire Protection Inc., experienced a significant scheduling backlog in the fall of 2023, attributable in part to a surge in inspection demand across the Permian Basin region. SLG had issued a written engagement letter to Lone Star Fire Protection Inc. dated August 28, 2023 — well in advance of the September 14, 2023 inspection deadline — confirming an appointment for the annual full-flow inspection. The inspection was ultimately scheduled by Lone Star for November 20, 2023. This appointment was only three days after the fire. SLG acted diligently and proactively in scheduling the inspection; the brief delay beyond the annual anniversary date was attributable entirely to the contractor's scheduling constraints, not to any neglect or intentional omission by SLG.
The existence of the August 28, 2023 engagement letter and the November 20, 2023 scheduled appointment date establish that SLG was actively and diligently pursuing compliance with the annual full-flow test requirement. A reasonable insurer investigating these facts would not characterize this brief, contractor-caused scheduling delay as a "failure to maintain" fire-suppression systems within the meaning of Exclusion 4(k).
2. No Causal Nexus Between the Alleged Maintenance Gap and the Loss.  Even if SLG's annual full-flow inspection gap could be characterized as a "failure to maintain" within the meaning of Exclusion 4(k) — which SLG denies — the exclusion would still not apply because Meridian cannot establish the required causal nexus.
The text of Exclusion 4(k) is critical. It does not exclude all losses that occur in a facility with a maintenance deficiency. Rather, it excludes only losses "caused by or resulting from" the insured's failure to maintain fire-protection systems. The exclusion's own language imposes a causation requirement: the failure to maintain must have caused or resulted in the loss. This is not a mere condition-based exclusion; it requires a demonstrable causal connection between the alleged maintenance failure and the insured loss.
The Ridgeline forensic report conclusively establishes the absence of any such causal connection:
First, the fire originated in the Square D Model QED-2 main electrical distribution panel, not in any component of the sprinkler system. The sprinkler system did not cause the fire. The cause of the fire — electrical arcing in the distribution panel — is wholly unrelated to the sprinkler system's maintenance status.
Second, even a fully code-compliant sprinkler system, having undergone a timely annual full-flow inspection, operating at its design pressure of 52 psi, would not have prevented the loss. The critical factor limiting the sprinkler system's suppression capability was not any maintenance deficiency but rather the municipal water-supply pressure deficit. The actual water-supply pressure on the night of the fire was only 36 psi — a 31% shortfall from the 52 psi design parameter. This pressure deficit rendered the sprinkler system incapable of delivering sufficient water flow to suppress the fire, regardless of the system's maintenance status. A fully inspected and maintained sprinkler system receiving only 36 psi of water pressure would have performed no differently than the system in place on November 17, 2023.
The undisputed forensic evidence therefore establishes that the alleged gap in the annual full-flow test did not cause, contribute to, or result in the cargo loss in any way. Meridian cannot carry its burden of proving causation, and Exclusion 4(k) therefore does not apply.
3. Legal Standard — The Insurer Bears the Burden of Proving Exclusion Applicability.  The Texas Supreme Court has established a clear burden-of-proof framework for insurance coverage disputes. Under Northgate Indemnity Co. v. Hudson Energy Co., 811 S.W.2d 552 (Tex. 1991), the burden of proving the applicability of a policy exclusion rests squarely on the insurer. The insured bears only the initial burden of demonstrating that a covered loss occurred. Once the insured has carried that burden — as SLG plainly has here — the burden shifts to the insurer to prove that a specific exclusion applies to defeat coverage.
Moreover, under well-settled principles of Texas insurance law, policy exclusions are construed strictly and narrowly, and any ambiguity in an exclusion is resolved in favor of coverage. See Nat'l Union Fire Ins. Co., 811 S.W.2d at 556; Balandran v. Harborline Casualty Group, 972 S.W.2d 738, 741 (Tex. 1998). These interpretive principles exist because the insurer drafted the policy language and is in the best position to craft unambiguous exclusions. Where the insurer has failed to do so, the insured should not bear the consequences of that drafting choice.
Applied here, Meridian bears the burden of establishing that both Exclusion 4(f) and Exclusion 4(k) apply to this loss. For the reasons set forth above, Meridian has failed to carry this burden as to either exclusion, and it will not be able to carry this burden at trial. The factual predicates Meridian has asserted are contradicted by the documentary evidence and the independent forensic investigation, and the legal standards governing exclusion interpretation disfavor Meridian's position at every turn.
VII. MERIDIAN'S EXPOSURE UNDER THE TEXAS INSURANCE CODE
Meridian's wrongful denial of SLG's claim does not merely entitle SLG to the indemnity amount due under the Policy. It also exposes Meridian to substantial statutory liability under the Texas Insurance Code, which provides powerful remedies for policyholders whose claims are wrongfully denied or unreasonably delayed. SLG's statutory claims significantly amplify Meridian's financial exposure in this matter and provide a compelling incentive for Meridian to resolve this dispute at mediation rather than face these claims in litigation.
A. Chapter 541 — Unfair Settlement Practices
Texas Insurance Code Chapter 541 prohibits unfair methods of competition and unfair or deceptive acts and practices in the business of insurance. Section 541.060 specifically addresses unfair settlement practices and provides, among other things, that it is an unfair settlement practice for an insurer to:
•  Fail 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)(2)(i));
•  Deny a claim without conducting a reasonable investigation (§ 541.060(a)(7)); and
•  Refuse to pay a claim without conducting a reasonable investigation with respect to the claim (§ 541.060(a)(3)).
Meridian's conduct in handling SLG's claim raises serious bad-faith concerns under Chapter 541. Most notably:
First, Exclusion 4(f) — the "Improper Storage" exclusion — was raised for the first time in Meridian's January 22, 2024 denial letter, without having been identified in the December 4, 2023 Reservation of Rights letter. A Reservation of Rights letter serves the critical function of identifying all potential grounds for denial so that the policyholder can respond to them during the investigation period. The belated invocation of Exclusion 4(f) — nearly two months after the Reservation of Rights letter and only in the denial letter itself — strongly suggests that this exclusion was asserted without adequate investigation and may have been raised as a post hoc justification to bolster a denial that was already predetermined. This conduct is precisely the type of claims-handling practice that Chapter 541 is designed to address.
Second, the factual bases for both Exclusion 4(f) and Exclusion 4(k) are demonstrably unsupported. As detailed at length in Section VI above, SLG's storage practices were fully compliant with shipper instructions and applicable industry standards, and the alleged sprinkler maintenance gap did not cause or contribute to the loss. Meridian's assertion of these exclusions on the basis of factually unsupported allegations — particularly where independent forensic evidence contradicts those allegations — constitutes a failure to conduct a reasonable investigation and a refusal to pay a claim that the insurer's liability has become reasonably clear.
The remedies available under Chapter 541 are substantial. A policyholder who establishes a violation of Chapter 541 is entitled to recover actual damages, and the court may award additional damages not to exceed three times the amount of actual damages — i.e., treble damages. See Tex. Ins. Code § 541.152(b). Additionally, a prevailing policyholder is entitled to recover reasonable and necessary attorney's fees. See Tex. Ins. Code § 541.152(a)(1).
SLG, through undersigned counsel, sent a pre-suit statutory notice to Meridian pursuant to Texas Insurance Code § 541.154 on July 1, 2024. This statutory notice initiates the sixty-day cure period prescribed by § 541.154, which runs through approximately August 30, 2024. If Meridian does not resolve this claim within the cure period, SLG will be entitled to pursue its Chapter 541 claims in litigation.
B. Chapter 542 — Prompt Payment of Claims
Texas Insurance Code Chapter 542, Subchapter B — commonly known as the "Prompt Payment of Claims Act" — imposes strict deadlines on insurers for acknowledging, investigating, and paying claims. When an insurer fails to comply with these deadlines, § 542.060 provides that the insurer is liable for the amount of the claim, plus eighteen percent (18%) per annum interest on the amount of the claim as damages, calculated from the date the claim was required to be paid, together with reasonable and necessary attorney's fees.
The penalty interest calculation in this case is as follows:
SLG submitted its sworn proof of loss to Meridian on February 1, 2024. Under § 542.058, the insurer must pay a claim not later than the fifth business day after the date the insurer notifies the claimant that the claim is accepted, or — if the insurer does not notify the claimant — not later than the sixtieth day after the insurer receives all items, statements, and forms reasonably requested and required. Under § 542.060, penalty interest begins to accrue on the date the claim should have been paid.
Calculating sixty-one business days from February 1, 2024 — the date Meridian received SLG's sworn proof of loss and all supporting documentation — yields an approximate interest accrual start date of April 29, 2024.
As of the scheduled mediation date of June 20, 2024, penalty interest has been accruing for approximately 52 days. Projected through August 2024, the penalty interest calculation is as follows:
It is critical for Meridian to understand that these statutory damages continue to accrue with each passing day. The longer Meridian delays resolution of this claim, the greater its financial exposure becomes. The 18% per annum penalty interest rate is punitive by design and serves as a powerful legislative incentive for insurers to pay valid claims promptly.
C. Total Exposure for Meridian
The following table summarizes Meridian's total financial exposure in the event this matter proceeds to litigation:
Meridian's total potential exposure in litigation substantially exceeds the policy limits. The statutory framework under the Texas Insurance Code is designed to ensure that insurers who wrongfully deny valid claims face consequences that are proportionate to the harm inflicted on policyholders. The exposure Meridian faces here — particularly the prospect of treble damages under Chapter 541 — should serve as a powerful incentive for Meridian to resolve this matter at mediation on terms that reflect the merits of SLG's position.
VIII. HISTORY OF SETTLEMENT NEGOTIATIONS
The parties have engaged in the following pre-mediation settlement communications:
April 12, 2024: Calderwood & Harkness, on behalf of SLG, sent a formal demand letter to Meridian (addressed to Patricia Ng, Vice President of Claims), with a copy to Kessler, Brandt & Howe LLP. The demand letter sought payment of $4,530,000, representing the full indemnity amount net of the SIR, together with all applicable remedies under Texas Insurance Code Chapters 541 and 542. The letter set a thirty-day response deadline. The demand letter detailed SLG's coverage position, summarized the findings of the Ridgeline forensic report, and outlined Meridian's statutory exposure.
May 6, 2024: Meridian, through KBH, responded to the demand letter with a written offer of $1,750,000, characterized as a "compromise" payment. This offer represented less than 39% of SLG's net claim amount. The offer letter did not meaningfully engage with SLG's factual and legal arguments regarding the inapplicability of the invoked exclusions, nor did it provide any revised factual basis for Meridian's denial. The offer was accompanied by a general release that would have required SLG to waive all statutory claims under the Texas Insurance Code.
May 10, 2024: SLG, through Calderwood & Harkness, rejected Meridian's offer as wholly inadequate. SLG's response letter reiterated the merits of SLG's coverage position, noted the continued accrual of penalty interest under § 542.060, and proposed that the parties submit the dispute to mediation at JAMS Houston in an effort to reach a fair resolution before litigation.
May 14, 2024: Meridian, through KBH, agreed to participate in mediation at JAMS Houston. The parties subsequently agreed on the selection of Hon. Margaret Colquitt (Ret.) as mediator, and the mediation session was scheduled for June 20, 2024.
The significant gap between Meridian's offer of $1,750,000 and SLG's demand of $4,530,000 (plus statutory remedies) reflects Meridian's unreasonable valuation of its exclusion defenses. As demonstrated throughout this Position Statement, neither Exclusion 4(f) nor Exclusion 4(k) has a viable factual or legal basis. Meridian's offer appears to apply a substantial discount for litigation risk that is not warranted by the actual risk Meridian faces. If anything, the litigation risk in this case is overwhelmingly weighted against Meridian, given the strength of SLG's coverage position and Meridian's substantial statutory exposure.
SLG approaches this mediation with the expectation that the Mediator will assist the parties in reaching a resolution that reflects the true merits of the dispute and the realistic litigation exposure Meridian faces.
IX. SLG'S SETTLEMENT DEMAND
SLG demands payment of $4,530,000, representing the full indemnity amount due under Policy No. IML-TX-0039821-2023, calculated as the total documented cargo loss of $4,780,000, less the $250,000 per-occurrence self-insured retention.
In addition to the indemnity amount, SLG seeks reimbursement of all accrued penalty interest under Texas Insurance Code Chapter 542, § 542.060, calculated at the statutory rate of 18% per annum from the approximate accrual date of April 29, 2024, through the date of payment. As noted above, this amount is approximately $250,128 through August 2024 and continues to grow with each passing day.
SLG reserves all rights under Texas Insurance Code Chapter 541, including the right to seek treble damages (up to three times actual damages) and reasonable and necessary attorney's fees. SLG has already sent the pre-suit statutory notice required by § 541.154, and the sixty-day cure period is running.
SLG is willing to engage in good-faith negotiations at mediation and acknowledges that mediation often requires both sides to exercise flexibility. However, SLG must be candid: any resolution of this dispute must reflect the overwhelming strength of SLG's coverage position and the legal and financial risks that Meridian faces in litigation. A settlement that does not meaningfully account for these realities would not be in SLG's interest, and SLG is prepared to pursue its claims through litigation if a fair resolution cannot be achieved at mediation.
X. CONCLUSION
The facts and law in this matter strongly favor Stonefield Logistics Group Inc. The core elements of this dispute can be summarized as follows:
The November 17, 2023 fire at Warehouse Building C was an accidental, electrical-origin event — a fortuitous loss that falls squarely within the broad all-risk coverage grant of SLG's Inland Marine Cargo Legal Liability Policy. The fire destroyed $4,780,000 in customer cargo that was in SLG's care, custody, and control. SLG promptly notified Meridian, timely submitted a comprehensive sworn proof of loss, and satisfied all procedural conditions precedent to coverage.
Neither of the exclusions Meridian has invoked — Exclusion 4(f) (Improper Storage) and Exclusion 4(k) (Failure to Maintain) — applies as a matter of fact or law. SLG's cargo storage practices were fully compliant with shipper instructions and applicable industry standards. The alleged sprinkler maintenance gap did not cause or contribute to the loss. The independent forensic investigation conducted by Ridgeline Forensic Consultants LLC confirms both of these conclusions. Meridian bears the burden of proving the applicability of these exclusions, and it cannot carry that burden.
Meridian's denial was wrongful and exposes Meridian to substantial statutory liability under the Texas Insurance Code, including 18% per annum penalty interest under Chapter 542 (accruing daily), potential treble damages under Chapter 541, and reasonable and necessary attorney's fees. Meridian's total potential exposure in litigation substantially exceeds the policy limits.
SLG has incurred significant legal fees and forensic investigation costs in prosecuting this claim and has been deprived of the indemnification to which it is entitled for nearly seven months. During this time, SLG has been required to address and manage claims from the cargo owners whose freight was destroyed — claims that the Meridian Policy was specifically designed to protect against. The financial and operational burden of Meridian's wrongful denial has been substantial.
SLG urges the Mediator to assist the parties in reaching a resolution that reflects the merits of SLG's position and avoids the additional costs, delay, and uncertainty of litigation for both sides. SLG believes that a fair and prompt resolution is in the interest of both parties, but any such resolution must be grounded in a realistic assessment of the factual record and the legal landscape.
SLG respectfully requests the opportunity to present additional information during the mediation session on June 20, 2024, including the Ridgeline forensic report, the Whitlock proof of loss and supporting documentation, the Warehouse Layout Plan Rev. 7, the Lone Star Fire Protection engagement letter, and SLG's sprinkler inspection records. SLG's counsel and representatives are prepared to address any questions the Mediator may have and to engage in constructive dialogue with Meridian in pursuit of a fair outcome.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Bellamy Responsible Partner
By: ________
Andrew Fitzpatrick Lead Associate
700 Louisiana Street, Suite 4500 Houston, TX 77002 Telephone: (713) 555-4100 Facsimile: (713) 555-4101
Counsel for Stonefield Logistics Group Inc.
Date: June 17, 2024
CERTIFICATE OF DELIVERY
The undersigned hereby certifies that a copy of the foregoing Confidential Mediation Position Statement of Stonefield Logistics Group Inc. was delivered to Hon. Margaret Colquitt (Ret.), Mediator, JAMS Houston, on June 17, 2024, in accordance with the JAMS Mediation Rules.
Pursuant to the JAMS Mediation Rules and the parties' agreement regarding the confidentiality of mediator's-eyes-only submissions, this Confidential Mediation Position Statement has not been served upon or delivered to opposing counsel, Kessler, Brandt & Howe LLP, or to Meridian Surety & Indemnity Company. A separate summary (non-confidential) mediation brief may be prepared and shared with Kessler, Brandt & Howe LLP if directed by the Mediator in advance of or during the mediation session.
By: ________
Howard Bellamy Responsible Partner Calderwood & Harkness LLP
Date: June 17, 2024
Cargo Description | Shipper/Owner | Quantity | Value
5-1/2" P-110 casing pipe | Permian Wellhead Services LLC | 312 joints | $1,842,000
Completion chemicals | Cantera Chemical Supply Co. | 47 pallets | $1,126,500
Downhole tools and sensors | Triton Subsurface Technologies Inc. | 18 crates | $987,000
Miscellaneous freight | Multiple shippers | Various | $824,500
TOTAL CARGO LOSS | $4,780,000
Item | Amount
Total documented cargo loss | $4,780,000
Less: Self-insured retention (SIR) per occurrence | ($250,000)
Net claim amount | $4,530,000
Policy Element | Detail
Policy Number | IML-TX-0039821-2023
Named Insured | Stonefield Logistics Group Inc.
Policy Period | April 1, 2023 – March 31, 2024
Type of Coverage | Inland Marine Cargo Legal Liability
Per-Occurrence Limit | $5,000,000
Annual Aggregate Limit | $10,000,000
Self-Insured Retention | $250,000 each occurrence
Annual Premium | $174,600
Issuing Insurer | Meridian Surety & Indemnity Company
NAIC No. | 28471
A.M. Best Rating | A (Excellent), FSC IX
Component | Calculation
Net claim amount | $4,530,000
Penalty interest rate | 18% per annum
Accrual period (through August 2024, approx.) | 112 days
Projected penalty interest | $4,530,000 × 0.18 × (112 / 365) ≈ $250,128
Component | Amount
Indemnity (net of SIR) | $4,530,000
Penalty interest under § 542.060 (accruing) | ~$250,128 (through August 2024, and growing)
Treble damages under Chapter 541 (up to 3× actual damages) | Up to $13,590,000
Attorney's fees (SLG's reasonable and necessary fees) | To be determined
Total potential exposure | Substantially exceeds policy limits

CONFIDENTIAL MEDIATION POSITION STATEMENT OF STONEFIELD LOGISTICS GROUP INC.

I. INTRODUCTION AND SUMMARY OF DISPUTE

II. THE PARTIES

IV. CARGO LOSS AND QUANTIFICATION

VI. MERIDIAN'S DENIAL AND ITS DEFICIENCIES

VII. MERIDIAN'S EXPOSURE UNDER THE TEXAS INSURANCE CODE

VIII. HISTORY OF SETTLEMENT NEGOTIATIONS

IX. SLG'S SETTLEMENT DEMAND

X. CONCLUSION

CALDERWOOD & HARKNESS LLP

CERTIFICATE OF DELIVERY

Record

Parties

Dates

Amounts