Southwest’s 2022 Holiday Meltdown Wasn’t Their First — They’re Still Fighting Insurance Over the 2016 $77 Million IT Failure

When Southwest cancelled nearly 17,000 flights 3 years ago over the holidays in 2022 it cost them nearly $1 billion. It began with weather, the airline melted down, losing track of crew and without systems that allowed them to rebuild their schedule.

As the operation got away from them, they were forced to rebuild manually – too big a task to recover more than half of their operation in a day. Customers were refunded. They were reimbursed for out of pocket expenses, even where they purchased flights on other airlines. And passengers who merely suffered delays were given 25,000 Rapid Rewards points.

But it was hardly the first time their computers failed. In fact, a 2016 IT meltdown is still in the courts.

On July 20, 2016, Southwest suffered a major systems failure that disrupted operations for three days with about 475,839 customers cancelled or delayed for hours. A router failed, and didn’t trigger a failover as expected, cascading across critical systems.

A decade later, Southwest and their insurance company Liberty Insurance Underwriters are still fighting over whether Southwest can collect the top $10 million layer of a cyber system failure insurance policy, for costs the airline incurred after the meltdown. The insurance company won in 2022, but the Fifth Circuit Court of Appeals revived the case in January 2024 and at the end of 2025 it was crucially determined that the policy phrase “but for” means “except for”. But the fight isn’t over.

Fortuitously, Southwest had bought a cyber-risk policy just weeks before the outage. The primary policy was from American International Group and there were excess layers including Liberty’s coverage that attaches once Southwest’s covered loss exceeds $50 million (which was above the primary policy plus the first three excess layers).

Southwest tags its losses at over $77 million from the incident. It collected $50 million from the primary policy and the first three excess layers, and went after Liberty for the next $10 million.

Liberty targeted five categories of costs arguing that without them, Southwest’s total losses would drop below $50 million and they wouldn’t be on the hook:

• Fare discount codes (“FareSaver Promo codes”)
  
• Travel vouchers
  
• Customer refunds for alternate arrangements
  
• Rapid Rewards points
  
• Advertising costs for extending a sale

The insurer basically said ‘these costs were Southwest’s choice, not a direct expense of the meltdown’ and the policy isn’t a blank check to spend whatever they wish. Customer make-goods are business choices, not losses “solely as a result of a System Failure.” That’s why the insurer won in district court in 2022. However, the appeals court disagreed.

• The policy’s loss definition uses a “lenient but-for causation” standard.
  
• The disputed categories can qualify as “losses” because the business decisions were “links in a causal chain” back to the system failure.
  
• If you accept the insurer’s position, then there is essentially no coverage.

The policy defined loss to include costs that “would not have been incurred but for a Material Interruption.” Southwest’s position, now backed by the courts, is that “but for” means “except for.” Would this cost exist if the outage hadn’t occurred?

Liberty argues that doesn’t complete the coverage analysis – it’s whether the costs are “solely” caused by system failure, are excluded by other temrs of the policy, and doesn’t put the insured in a better position than absent the outage.

In their view, the immediate cause of issuing vouchers, points and discount codes is Southwest choosing to do it, not the outage. The Fifth Circuit disagreed, decisions as part of the causal chain rather than an independent competing cause.

Ultimately, just because you have insurance doesn’t mean your losses are insured – or that you can expect full payment within a decade. So it’s a lot cheaper to actually fix your IT than get someone to pay you not to have done so.