Excess Insurer's Denial of a Claim Goes Southwest

The Fifth Circuit reversed and remanded a case that had found certain compensation costs incurred by an insured were not covered because they were discretionary. The case is SW. Airlines Co. v. Liberty Ins. Underwriters, Inc., 90 F.4th 847 (5th Cir. 2024). Please note that this case is separate and distinct from Southwest’s system failure in 2022.

In 2016, Southwest Airlines experienced a computer failure that knocked out its flight schedule for three days and led to cancellations or delays longer than two hours for nearly 476,000 flights. Southwest issued promo codes, refunds, travel vouchers, and rewards points to customers whose flights had been affected by the system failure; the airline also incurred advertising expenses to extend a sale that had been running at the time of the computer failure. These categories–promotions, refunds, vouchers, rewards points, and advertising, collectively called “compensation costs”–made up more than $35 million of the total claim.