By Al Haverkamp of Lucas & Haverkamp
1Question: On 7/20/16 Southwest Airlines suffered a massive computer failure, which resulted in a three-day disruption of its flight schedule. During the disruption, approximately 475,839 Southwest customers experienced either a flight cancellation or a delay of two hours or more. Southwest incurred losses of more than $77M as a result of the system failure including the following: (a) $17M in FareSaver Promo codes – discount codes given to customers whose flights were cancelled or delayed; (b) $7M in Travel Vouchers – vouchers disbursed to customers whose flights were cancelled or delayed; (c) $4M in Rapid Rewards Points – points distributed to frequent flier customers whose flights were cancelled or delayed; and (d) $1.2M in advertising costs – Southwest was conducting a sale at the time of the system failure, and, as a result of it, extended the sale a week. Southwest was insured under a cyber risk policy issued by Liberty. The policy included a provision for “System Failure Coverage” providing that the insurer “shall pay all Loss … that an insured incurs … solely as a result of a System Failure.” Liberty denied coverage for items (a) thru (d), asserting these losses were not incurred solely as a result of the system failure but rather were the result of Southwest’s subsequent business decisions. Is there coverage?
Answer: Yes. The Court noted the policy defined “losses” to mean “costs that would not have been incurred but for a Material Interruption.” “Material Interruption” was defined as the “actual and measurable interruption or suspension of an insured’s business caused by … a System Failure.” Under this lenient but-for causation standard, Southwest’s costs [items (a) thru (d)] were covered losses. See Southwest Airlines v Liberty Ins. 90 F.4th 847 (5th Cir. 2024). Although this case is based on Texas law, it is important because there aren’t many significant cases interpreting Cyber policies and the interpretation rules employed by the Court are similar to those of California.