Southwest Airlines wins reversal against Liberty Insurance over computer crash
Writing for the panel, Fifth Circuit Judge James E. Graves Jr. said the court must determine whether the five categories of costs were losses incurred solely as a result of the system failure.
A Southwest Airlines Co. appeal of a denial on a massive computer failure claim has been reversed by the U.S. Court of Appeals for the Fifth Circuit.
On July 20, 2016, Southwest suffered a massive computer failure that disrupted about 475,839 customers.
Southwest had cyber risk insurance with AIG Inc. and a series of related excess policies, including one with Liberty Insurance Underwriters Inc. that provided coverage up to $10 million, but was only implicated if Southwest’s system-failure losses exceeded $50 million.
Southwest calculated losses of $77 million and collected $50 million from AIG and the other insurers.
But when the company got to Liberty, its claim was denied. On Sept. 16, 2019, Southwest filed suit for breach of contract, bad faith and a declaratory judgment.
Liberty argued over five categories of costs that Southwest claimed, stating they were not incurred solely as a result of the system failure but rather were the result of Southwest’s subsequent business decisions.
The five categories in dispute were Southwest’s FareSaver Promo codes, travel vouchers, cover refunds, Rapid Rewards Points, and advertising costs.
Writing for the panel, Fifth Circuit Judge James E. Graves Jr. said the court must determine whether the five categories of costs were losses incurred solely as a result of the system failure.
“Our inquiry requires us to determine the meaning of the terms ‘Loss; incur; and sole cause,’” Graves said in the opinion.
The Fifth Circuit panel concluded that “losses” meant costs that would not have been incurred but for a material interruption, in this case a system failure. The court concluded the five categories satisfy “that lenient but-for causation standard and are therefore ‘losses.’”
Liberty argued the system failure cannot be the sole cause of Southwest’s claimed costs because the “independent” and “more direct” cause of those losses was Southwest’s decision to incur them.
However, the court reasoned that those decisions can only be independent, sole causes of the costs if they were the precipitating causes of the costs.
“This inquiry only shows that the district court erred in concluding that Southwest’s five categories of costs were all precluded as a matter of law because they were discretionary,” Graves said.
Liberty argued that if Southwest’s covered losses include discretionary costs, Southwest could dictate the amount of its own loss. But the Fifth Circuit said that would only be true if no causation standard applied, and the policy still requires a causal nexus between the system failure and Southwest’s costs.
On remand, the court instructed that to resolve the coverage question, Liberty would need to explain how the cover refunds in particular would not qualify as recoverable mitigation costs that arose solely as a result of the system failure.
Conversely, Southwest would need to explain how its claims for a week of advertising (for a single-day interruption of its ad campaign) and for FareSaver Promo codes, which potentially allowed redemption for those who were not impacted by the cancellations, would not grant the company a windfall.
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