United Wants Insurance To Reimburse Miles And Vouchers From CrowdStrike Outage — Lawsuit Says Airline Already Got Paid

One of the fascinating things about covering airlines is the areas of business, law, and politics that I learn by taking deep dives with my morning coffee. I’m not an insurance law expert, which is why summer 2024’s CrowdStrike outage has become so interesting. The world’s computers, and airlines, have recovered (well, maybe not Delta) so the action is now in the courts over payouts.

This week United Airlines sued Homesite Insurance and Homesite Insurance sued United Airlines both in the Northern District of Illinois. The insurer filed first, seeking declaratory judgment. United filed the next day.

Homesite isn’t the primary insurer. They participate in $5 million of a $10 million layer of excess coverage above $45 million of underlying insurance. That policy itself has a $50 million retention (similar to a deductible). And they’re fighting over:

• Whether reimbursements United received from CrowdStrike reduce its total losses, or whether the money counts towards the retention.
• What counts as losses – are miles and travel vouchers United handed out, but that weren’t legally required, actually covered?

Watch the 12-hour timelapse of American Airlines, Delta, and United flight traffic after the Crowdstrike IT outage hit pic.twitter.com/i2dfNDiJuQ

— Chief Nerd (@TheChiefNerd) July 19, 2024

United’s Insurer Says CrowdStrike Payments Reduced Losses, So They Shouldn’t Double Dip

United’s case is that their losses were more than enough to exhaust the retention and the primary insurance policy, so Homesite has to pay out its $5 million share of the excess coverage.

The argument is over how to treat money United recovered from CrowdStrike (or other third parties):

• United incurred a large pool of CrowdStrike losses.
  
• United payments and third-party recoveries together satisfied the retention.
  
• Homesite must then cover separate losses in its excess layer.
  
• United says it is not asking Homesite to reimburse the particular dollars already paid by a third party.

They’re fighting over policy language that says no loss “shall be paid hereunder” to the extent United collected that loss from a third party.

United argues this limits what Homesite pays, not what counts toward exhaustion of the retention. The clause is meant to prevent double dipping insurance coverage. The insurance company argues third-party recoveries reduce the amount United actually ‘lost’.

Homesite says United must first deduct third-party recoveries from its claimed losses, and then only United’s remaining uncompensated loss can count toward the retention. United can’t use the same loss to obtain payment from CrowdStrike and to unlock insurance coverage.

Here’s a simplified example. Let’s say United’s total losses were $105 million, and CrowdStrike reimbursed them $20 million. In United’s calculation, they get paid by the excess coverage layer, and in the insurer’s they don’t.

		United says		Homesite says
Total losses		$105M		$105M
CrowdStrike Payments (E.g. $20M)		Counts toward retention		Reduces loss
Net loss for insurance		$105M		$85M
Homesite pays?		Yes		No

Can United Bill Insurance For Goodwill Compensation?

United says cash payments, hotel and meal costs, ground transportation, travel certificates, MileagePlus miles and related customer assistance qualify as covered “Passenger Compensation” because United was obligated to compensate or care for affected passengers.

Homesite says United hasn’t identified a law requiring travel certificates and miles that United itself called “gestures of goodwill.”

This was still during the Biden administration, of course, when the Department of Transportation would apply significant pressure on airlines to compensate passengers even when not legally obligated to do so. Airlines don’t want to anger their regulator, which can make life difficult for them across a variety of dimensions. There’s legally obligated, and legally obligated!

They’re also arguing over lost revenue for flights that actually operated, but where connecting passengers couldn’t make it to their connections. Homesite says that United’s calculations overstate these losses.

Who Has The Better Case?

Homesite says United is impermissibly seeking double recovery by counting money recovered from third parties toward the amount necessary to exhaust its retention and reach Homesite’s excess layer, and that goodwill compensation shouldn’t be insurable to the extent it’s discretionary.

And since I don’t have enough of a background in insurance law to adjudicate a reasonably disputable position here, I can’t really say more than:

• The CrowdStrike failure is generally covered.
• A retention ordinarily represents loss the insured must absorb. Using a vendor recovery to satisfy it is aggressive.
• But “paid hereunder” can reasonably be read as preventing duplicate insurer payment, not regulating retention exhaustion.
• Discretionary miles and travel credits were given as a result of the outage, but were… discretionary but necessary to protect the business.

I believe that a court will enforce ambiguous policy language against the insurer (tie goes to United in some sense) but I’m actually not sure which side has the more conventional interpretation here under Illinois law.

What’s intuitive to me, but not necessarily the law, is that United’s insured loss should be measured net of compensation received for the same loss. United’s position seems to convert a $20 million vendor reimbursement into $20 million of artificial retention exhaustion while still making the excess insurers pay as though United had borne the full amount.