Court Opinion

ID: 9918979
Source: CourtListenerOpinion
Date Created: 2024-01-17 01:00:33.670327+00
Date Added: 2024-06-11T08:06:55.993187
License: Public Domain

Case: 22-10942     Document: 00517034014        Page: 1      Date Filed: 01/16/2024

           United States Court of Appeals
                for the Fifth Circuit                                  United States Court of Appeals
                                                                                Fifth Circuit
                                ____________                                  FILED
                                                                       January 16, 2024
                                 No. 22-10942
                                ____________                             Lyle W. Cayce
                                                                              Clerk
   Southwest Airlines Company,

                                                          Plaintiff—Appellant,

                                     versus

   Liberty Insurance Underwriters, Incorporated,

                                            Defendant—Appellee.
                  ______________________________

                  Appeal from the United States District Court
                      for the Northern District of Texas
                           USDC No. 3:19-CV-2218
                  ______________________________

   Before Graves, Higginson, and Ho, Circuit Judges.
   James E. Graves, Jr., Circuit Judge:
         Defendant    Liberty   Insurance     Underwriters    denied    Plaintiff
   Southwest Airlines’s claim for reimbursement under its cyber risk insurance
   policy for costs related to a computer system failure. The district court
   granted summary judgment for Liberty, concluding that those costs were
   purely discretionary and therefore either not covered under the policy’s
   insuring clause or barred by the policy’s exclusions. We conclude that the
   costs are not categorically barred from coverage as a matter of law, and
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                                         No. 22-10942

   accordingly we REVERSE and REMAND for proceedings consistent with
   our opinion.1
                                  I. BACKGROUND
           On July 20, 2016, Southwest 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 cancelation or a delay of two hours or more.
           Just weeks earlier, Southwest had purchased a so-called cyber risk
   insurance policy from 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 series of follow form excess
   policies, including one from Liberty. Under the Liberty policy, the company
   provided excess coverage under the terms of AIG’s cyber risk policy 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. To
   recoup those losses, it began climbing the cyber risk insurance tower, and, by
   March 2018, it had collected $50 million from AIG and the other insurers on
   the first three tiers. When it reached Liberty, however, its claim was denied.
   Liberty challenged five categories of Southwest’s claimed losses, without

           _____________________
           1
            Judge Ho would certify the question presented regarding consequential damages
   to the Texas Supreme Court. See, e.g., JCB, Inc. v. The Horsburgh & Scott Co., 941 F.3d 144,
   145 (5th Cir. 2019).

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   which its covered losses would total less than $50 million and therefore
   would not trigger the Liberty policy:

       FareSaver Promo codes, constituting $16,563,656.00 in costs.
          FareSaver Promo codes are 50% discount codes; each code is redeem-
          able for up to eight passengers. The codes were disbursed to custom-
          ers whose flights were canceled or delayed two hours or more.
       Travel vouchers, constituting $6,644,801.00 in costs. Southwest is-
        sued such vouchers for specific dollar amounts and disbursed to cus-
          tomers whose flights were canceled or delayed two hours or more.
       Cover Refunds, constituting $7,366,000.00 in costs. Cover Refunds
        are reimbursements made by customer service agents to customers
          upon request to compensate for alternate travel arrangements, such as
          buses, rental cars, and hotels.
       Rapid Rewards Points, constituting $3,561,363.00 in costs. Rapid
          Rewards Points are redeemable for airline tickets and were distributed
          to members of its frequent flier program whose flights were canceled
          or delayed two hours or more.
       Advertising costs, constituting $1,217,921.00 in costs. Southwest
          was conducting a sale at the time of the system failure, and, as a result
          of it, extended the sale for a week.

          On September 16, 2019, Southwest sued Liberty for breach of
   contract, bad faith, and declaratory judgment on the issue of coverage.
   Liberty moved for summary judgment, arguing that Southwest’s claims
   failed due to the lack of coverage under the System Failure Coverage

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   provision, or, alternatively, due to the operation of three exclusions in the
   policy2. Southwest filed a cross-motion for partial summary judgment.
          On September 6, 2022, the district court issued a terse order granting
   Liberty’s motion. The district court’s analysis on the central issue in this
   appeal was contained in a footnote, in which it concluded 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.” It also concluded that coverage was
   barred under the policy exclusions and that Southwest’s bad faith claims
   failed by operation of law and on the merits. Finally, it denied Southwest’s
   motion for partial summary judgment. Southwest appealed.
                           II. STANDARD OF REVIEW
          The standard of review on summary judgment is de novo. Davidson v.
   Fairchild Controls Corp., 882 F.3d 180, 184 (5th Cir. 2018). Summary
   judgment is appropriate if the moving party demonstrates that there is no
   genuine dispute of material fact and that it is entitled to judgment as a matter
   of law. Id. (quoting Fed. R. Civ. P. 56(a)). This court “may affirm
   [summary judgment] on any grounds supported by the record.” McGruder v.
   Will, 204 F.3d 220, 222 (5th Cir. 2000).
          Texas law applies to the Liberty policy. See Tex. Ins. Code Ann.
   art. 21.42. “In Texas, the construction of a contract presents a question of
   law.” Balfour Beatty Constr., L.L.C. v. Liberty Mut. Fire Ins. Co., 968 F.3d
   504, 509 (5th Cir. 2020) (citations omitted).
                                    III. DISCUSSION
                                 a. The coverage provision
          _____________________
          2
              Only two of those exclusions are at issue on appeal.

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          As set forth above, the policy’s System Failure Coverage provision
   covers “all Loss . . . that an Insured incurs . . . solely as a result of a System
   Failure . . . .” Liberty argues that all five categories of costs that Southwest
   claimed were not incurred solely as a result of the system failure but rather
   were the result of Southwest’s subsequent business decisions. Southwest
   acknowledges that those costs were the result of business decisions but
   argues that, under the plain terms of the policy, they are covered.
          In Texas, interpretation of an insurance policy begins with its actual
   words, “because it is ‘presume[d] parties intend what the words of their
   contract say.’” Terry Black’s Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22
   F.4th 450, 454 (5th Cir. 2022) (quoting Gilbert Tex. Constr., L.P. v.
   Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010)). Because
   we 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.”
          When a policy defines a term, we use that definition; otherwise, we
   endeavor to find the term’s “ordinary and generally-accepted meaning.”
   Terry Black’s, 22 F.4th at 455 (citing Gilbert, 327 S.W.3d at 126). Texas law
   requires us to begin that inquiry with the dictionary. Cooper Indus. Ltd. v.
   Nat’l Union Fire Ins. Co. Pittsburgh, 876 F.3d 119, 128 (5th Cir. 2017) (citation
   omitted). We then look to “the term’s usage in other statutes, court
   decisions, and similar authorities.” Pharr-San Juan-Alamo Indep. Sch. Dist.
   v. Texas Pol. Subdivisions Prop./Cas. Joint Self Ins. Fund, 642 S.W.3d 466, 474
   (Tex. 2022).
          Here, the policy defines “losses” to mean, as relevant, “costs that
   would not have been incurred but for a Material Interruption.” It defines
   Material Interruption as “the actual and measurable interruption or
   suspension of an Insured’s business directly caused by . . . a System Failure.”

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   We therefore conclude that Southwest’s five categories of costs satisfy that
   lenient but-for causation standard and are therefore “losses.”
          The policy does not define “incur” but the Texas Supreme Court has
   done our work for us here, relying on dictionaries to define “incur” to mean
   to “become[] liable for,” Garcia v. Gomez, 319 S.W.3d 638, 642 n.4 (Tex.
   2010) (citing Webster’s Ninth New Collegiate Dictionary
   611 (1984) and Incur, Black’s Law Dictionary 771 (7th ed.1999) (“to
   suffer or bring on oneself (a liability or expense)”)). Another dictionary
   similarly defines “incur” as “to become liable or subject to” or to “bring
   down      upon       oneself.”      Incur,      merriam-webster.com,
   https://www.merriam-webster.com/dictionary/incur (last visited Dec. 12,
   2023). Because Southwest’s five categories of costs were ones that
   Southwest brought upon itself, we therefore conclude that they were
   “losses” that it “incurred.”
          The policy does not define “solely.” According to the Texas Supreme
   Court, also relying on a dictionary, the word means “‘to the exclusion of all
   else’” and “‘without another.’” Northland Indus. v. Kouba, 620 S.W.3d 411,
   416 (Tex. 2020) (citing Webster’s Ninth New Collegiate Dic-
   tionary (1984); Webster’s Third New Int’l Dictionary
   (2002)). But that definition, standing alone, does not resolve the question.
   Namely, it does not tell us whether “to the exclusion of all else” means there
   can be no intermediate causes—such as a discretionary decision—or whether
   it only means there can be no other originating or precipitating causes.
          We look to Texas law for more clarity. See Pharr, 642 S.W.3d at 474.
   The parties concede that there are no cases directly on point in the context
   of business interruption insurance. Oral Arg. at 04:19–04:23; 34:04–34:28,
   https://www.ca5.uscourts.gov/OralArgRecordings/22/22-10942_10-4-
   2023.mp3. But the policy at issue is hardly the first time the words “sole” or

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   “solely” have been used in a Texas insurance policy with regard to causation.
   In Wright v. Western Southern Life Insurance Company, for example, an injury
   policy covered “the loss of a foot ‘solely as a result of accidental bodily injury
   sustained or disease . . . .’” 443 S.W.2d 790, 790 (Tex. App.—Eastland 1969,
   no writ). The insured claimed that gangrene was the sole cause of the loss of
   his foot. See id. at 790-91. In interpreting the policy, the Court of Civil
   Appeals explained that a “sole” cause is one independent of any other cause,
   applying the Texas Supreme Court’s decision in Mutual Benefit Health &
   Accident Association v. Hudman, 398 S.W.2d 110 (Tex. 1965)). Accordingly,
   the court held that gangrene was not the sole cause of the loss because it was
   not the independent cause; rather, the sole cause was an earlier gunshot, which
   alone precipitated the gangrene infection and ultimately the amputation of
   the plaintiff’s foot. Wright, 443 S.W.2d at 790–92.
          Much more recently, we applied that same definition of sole cause to
   a Texas life insurance policy that paid out only when a bodily injury was the
   “sole cause” of death. Wells v. Minn. Life Ins. Co., 885 F.3d 885, 888 (5th
   Cir. 2018); see also id. at 892–93. Like the court in Wright, we equated sole
   cause to independent cause. Id. at 892. Applying that definition, we
   concluded that an injury is still the sole cause of death even if death resulted
   more directly from complications like septic shock or multi-system organ
   failure. Id. at 893–94. We explained that those complications were not
   independent causes but rather were caused by the original injury. Id. In turn,
   the complications did not “strip the [original injury] of its ‘sole proximate
   cause’ status.” Id. at 894.
          Here, Liberty argues that 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. But those
   decisions can only be independent, sole causes of the costs if they were the
   precipitating causes of the costs. The decisions, like the infection in Wright or

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   the medical complications in Wells, were not precipitating causes that
   competed with the system failure, but links in a causal chain that led back to
   the system failure.
           To be clear, 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. We do not determine whether
   the system failure was in fact the sole cause of each of the costs that
   Southwest claims.
           To that end, Liberty argues that if Southwest’s covered losses include
   discretionary costs, Southwest could “literally dictate the amount of its own
   ‘loss.’” But that would only be true if no causation standard applied at all.
   The policy still requires a causal nexus between the system failure and
   Southwest’s costs. Indeed, it even contains a provision to guide that
   causation inquiry, limiting coverage to only the costs that are deemed
   appropriate based on Southwest’s “probable business” if no system failure
   occurred.
           Likewise, basic insurance principles still apply. The general purpose
   of business interruption insurance is “to compensate an insured for losses
   stemming from an interruption of normal business operations . . . thus
   preserving the continuity of the insured’s business earnings by placing the
   insured in the position that it would have occupied if there had been no
   interruption.” 11A Couch on Ins. § 167:9 (3d ed. 2023) (emphasis
   added).3 And as with any other contract, “the general duty to mitigate

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           3
            Liberty’s objection that this analysis is inapposite due to the treatise’s specific
   discussion of “damage or destruction of property from a covered hazard” does not
   convince us that the overall purpose behind business interruption insurance arising from
   physical damage is not analogous to the overall purpose behind business interruption
   insurance arising from system failure.

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   damages may come into play as a factor in construing policy coverage terms.”
   Id. at § 168:15. Under those principles, costs that Southwest incurred for
   mitigation may be recoverable, but recovery that would put Southwest in a
   better position than it would have occupied without the interruption would
   seem to be beyond the scope.
          To ultimately resolve the coverage question, it will be essential to
   consider the extent to which recovery for each category of loss at issue
   comports with those principles. 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; just as 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 cancelations)
   would not grant the company a windfall.
          Ultimately, the question of the exact costs to which Southwest is
   entitled is not before this court, because the district court did not reach it.
   We conclude only 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.
                             b. The policy exclusions
          Next, Liberty argues that even if Southwest’s claimed costs are cov-
   ered, they are barred by two policy exclusions. The district court agreed and
   granted summary judgment on that alternative basis as well.
          The first of those exclusions, Exclusion SF(b), provides that Liberty
   is not liable for “any Loss . . . alleging, arising out of, based upon or
   attributable to contractual penalties or consequential damages.” The parties
   agree that whether the exclusion applies here boils down to how we interpret
   the words “consequential damages.”

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          Generally, we “adopt[] the ordinary meaning of words and terms as
   they are commonly understood by the average laymen in preference to a
   technical meaning as understood by members of a profession . . . ” Wells, 885
   F.3d at 890. But the parties essentially agree that “consequential damages”
   is a legal term that is not particularly susceptible to a “layman”
   interpretation. Liberty’s proffered definition of “consequential damages”—
   any costs that “do not flow directly and immediately from the act”—is
   ultimately sourced from Black’s Law Dictionary. See, e.g., PHI, Inc. v. Apical
   Indus., 946 F.3d 772, 775 n.5 (5th Cir. 2020) (citing Damages, Black’s
   Law Dictionary (11th ed. 2019)). Southwest argues that the phrase is a
   legal term of art and refers to the type of harms that flow “naturally, but not
   necessarily, from the defendant’s breach and are not the usual result of the
   wrong.” See James Constr. Grp., L.L.C. v. Westlake Chem. Corp., 650 S.W.3d
   392, 417 n.25 (Tex. 2022) (citations and internal quotation marks omitted).
   For instance, Southwest’s definition would include as consequential
   damages—and thus exclude coverage for—costs Southwest would incur if it
   were sued by a passenger claiming that her canceled flight caused her to miss
   a lucrative business opportunity.
          To resolve the disagreement, we first turn to some basic principles
   concerning policy structure. First, we acknowledge that a policy’s main
   insuring clause sets the boundaries of coverage while its exclusions
   “subtract” from that coverage. Columbia Cas. Co. v. Georgia & Florida
   RailNet, Inc., 542 F.3d 106, 112 (5th Cir. 2008) (applying Texas law). But we
   are also mindful that we must “harmonize and give effect to all provisions so
   that none will be meaningless,” Gilbert, 327 S.W.3d at 126 (citation omitted),
   and that we should avoid interpretations that “would render coverage under
   the endorsement largely illusory,” ATOFINA Petrochemicals, Inc. v.
   Continental Cas. Co., 185 S.W.3d 440, 444 (Tex. 2005).

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          Together, those principles favor Southwest’s interpretation. Under
   Liberty’s definition of consequential damages, the policy would exclude
   coverage for any costs that are not “direct” and “immediate,” and as Liberty
   would have it, is so narrow that in practice it may not cover much beyond, for
   example, the cost of technical repairs to Southwest’s computer systems.
   Indeed, that interpretation would effectively wipe out entire portions of the
   policy. For one thing, it would seem to preclude costs incurred as a result of
   a decision to mitigate damages from the system failure, even though, as we
   explained above, the System Failure Coverage provision permits such costs
   in principle. It would also outright negate other provisions, such as one that
   covers Southwest’s lost income for up to 120 days and another that covers
   the cost of fines and penalties assessed against Southwest by civil authorities.
          Liberty’s definition of consequential damages would do much more
   than “subtract” from coverage; it would render much of the coverage under
   the policy completely illusory. Because of this, and because Southwest’s
   construction is “not unreasonable,” id., we must adopt Southwest’s
   interpretation instead. We therefore conclude that the district court erred in
   determining that the five categories of costs are consequential damages
   excluded from coverage.
           The second exclusion at issue, Exclusion 3(i)(1), provides that
   Liberty will not pay for “any Loss . . . arising out of, based upon or attributable
   to . . . any liability to third-parties for whatever reason . . . .” Liberty interprets
   the term “third-parties” to include Southwest’s customers and therefore
   argues that the exclusion applies to any payments to customers, such as
   refunds; payments for lost, damaged, or delayed luggage; and refunds for
   alternative travel arrangements.
          The dictionary defines “third party” as “a person other than the
   principals.”          Third          party,         merriam-webster.com,

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   https://www.merriam-webster.com/dictionary/third%20party (last visited
   Dec. 12, 2023). It defines “liability” as, inter alia, a “pecuniary obligation.”
   Liability,          merriam-webster.com,                            https://www.merriam-
   webster.com/dictionary/third%20party (last visited Dec. 12, 2023). While
   those definitions generally favor Liberty, the court must still interpret the
   policy in a way that “harmonizes” its provisions. Gilbert, 327 S.W.3d at 126.
   And Liberty’s broad definition of “third party” would effectively wipe out
   provisions in the policy that explicitly cover other “pecuniary obligations” to
   “a person other than the principals,” including provisions covering
   Southwest’s payroll obligations to its employees, and fines owed to
   regulators. See ATOFINA, 185 S.W.3d at 444.4 The term “third parties”
   therefore does not apply to Southwest’s customers and, in turn, does not
   preclude costs related to Southwest’s payments to its customers.
   Consequently, the district court erred in granting summary judgment on that
   basis as well.
                        c. Southwest’s extra-contractual claims
           The district court granted summary judgment to Liberty as to
   Southwest’s bad faith claim on the basis that Southwest’s five categories of
   costs were barred from coverage, and alternatively, because it concluded that
   there was a bona fide dispute between the parties as to coverage. Because we
   conclude that Southwest’s costs are not barred as a matter of law, only the
   district court’s second basis remains for us to consider.

           _____________________
           4
            Another provision requires losses to “be reduced by any amounts recovered by
   an Insured . . . from any third party . . . .” If we applied Liberty’s definition of “third party”
   consistently throughout the policy, that provision would become absurd, because it would
   imply that Southwest is able to recover “amounts” from its own customers for losses
   stemming from system interruptions.

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          For any of its claimed costs, Southwest, to survive summary judgment
   on its bad faith claim, must make a prima facie case that Liberty “knew or
   should have known that it was reasonably clear that [Southwest’s claim was]
   covered” but denied the claim anyway. Universe Life Ins. Co. v. Giles, 950
   S.W.2d 48, 49 (Tex. 1997). Southwest must show “the absence of a
   reasonable basis to deny the claim,” id. at 51, or, put differently, the absence
   of a bona fide dispute as to coverage, Higginbotham v. State Farm Mut. Auto.
   Ins. Co., 103 F.3d 456, 460 (5th Cir. 1997).
          Liberty submitted evidence showing that Southwest’s executives
   expected its insurance claims to meet opposition from insurers. In turn,
   Southwest submitted evidence showing that Liberty insistently pursued the
   argument—which Southwest calls “preposterous”—that the system failure
   and business interruption were not the “but for” cause of four of the five
   categories of loss now in dispute. It is not clear from the district court’s order
   how it viewed that evidence. Regardless, we conclude that Southwest
   satisfied its burden of showing that a genuine dispute of material fact exists
   as to whether Liberty had a reasonable basis to deny Southwest’s claims. See
   Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Consequently, the district
   court also erred in granting summary judgment on that basis.
          The district court made no mention of another aspect of Southwest’s
   bad faith claim, which is based on Texas Insurance Code section 542.060 and
   concerns Liberty’s alleged failure to promptly respond to Southwest’s
   insurance claim. Because the district court did not address the issue, we
   remand it for consideration in the first instance.
                           d. Southwest’s cross-motion
          Finally, Southwest sought partial summary judgment on the issue of
   whether its costs satisfied the “but for” causation standard. The district
   court denied the motion without analysis, though we assume that the reason

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   was mootness. Because the motion is not moot, it is also remanded for
   consideration in the first instance.
                              IV. CONCLUSION
          The district court’s order granting summary judgment is
   REVERSED and the matter is REMANDED for proceedings consistent
   with our opinion.

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