Fifth Circuit Reverses Summary Judgment Awarded to Insurer on Cyber Risk Claim

    The Fifth Circuit reversed the district court's grant of summary judgment in favor of the insurer on a cyber risk claim. Southwest Airlines Co. v. Liberty Ins. Underwriters, Inc., 2024 U.S. App. LEXIS 996 (5th Cir. Jan. 16, 2024).

    Southwest suffered a massive computer failure, which resulted in a three-day disruption of its flight schedule. Approximately 475,839 Southwest customers experienced either a flight cancelation or a delay of two hours or more. 

    Southwest had a cyber risk policy issued by non-party AIG, Inc. 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 . . ." Southwest also purchased a follow form excess policy from Liberty for up to $10 million in losses. The excess policy positioned Liberty above three other excess insurers and AIG. Liberty's coverage was only implicated if Southwest's system-failure-related losses exceeded $50 million. 

    Southwest calculated that it ultimately incurred more than $77 million in losses as a result of the system failure and resulting-flight disruptions. It collected $50 million from AIG and the other insurers on the first three tiers. When it reached Liberty, the claim was denied, Liberty challenged five categories of Southwest's claimed losses, without which its covered losses would total less than $50 million and therefore not trigger Liberty's policy: (1) FareSaver Promo codes; (2) Travel vouchers; (3) Cover Refunds; (4) Rapid Rewards Points; and (5) Advertising costs. 

    Southwest sued Liberty for breach of contract and bad faith. Liberty moved for summary judgment. Southwest filed a cross-motion for partial summary judgment. The district court granted Liberty's motion, finding that Southwest's costs were not caused by the system failure but rather were the result of various and purely discretionary customer-related rewards programs, practices and market promotions. 

    On appeal, the Fifth Circuit noted that 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 directly caused by . . . a System Failure." The Fifth Circuit concluded that Southwest's five categories of costs satisfied the lenient but-for causation standard and were therefore "losses."

    Liberty argued that the system failure could not be the sole cause of Southwest's claimed costs because the "independent" and "more direct" cause of the losses was Southwest's decision to incur them. But the decision could only be independent, sole causes of the costs if they were the precipitating causes of the costs. 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. The question of the exact costs to which Southwest was entitled was not before the court because the district court did not reach it. The court only concluded that the district court should not have granted summary judgment as a matter of law on the basis of the policy's main insuring provision.

    The Fifth Circuit also determined the two policy exclusions asserted by Liberty were not applicable. Finally, regarding the bad faith claim, Southwest satisfied its burden of showing that a genuine dispute of material fact existed as to whether Liberty had a reasonable basis to deny Southwest's claims. Consequently, the district court also erred in granting summary judgment on the bad faith claim on this basis.