Texas Federal Court Hands Cyber Policyholders Major Win in Southwest Airlines Coverage Dispute

On January 27, 2026, the U.S. District Court for the Northern District of Texas ruled favorably for policyholders in a major ongoing cyber-insurance dispute between Southwest Airlines and Liberty Insurance when it accepted the Magistrate Judge's findings and recommendations in Southwest Airlines Co. v. Liberty Insurance Underwriters Inc., Civil Action No. 3:19-CV-2218-E, the court reinforced critical legal protections for policyholders facing coverage denials. 

Background

Southwest sued Liberty after the insurer declined to pay on an excess insurance policy for claimed losses arising out of the airline’’s July 2016 systemwide computer failure that resulted in a three-day disruption of flights and flight cancellations affecting approximately 475,000 Southwest customers. Liberty’’s policy provided $10 million of coverage, but it was triggered only if Southwest’s losses surpassed $50 million in primary and lower level excess exposure. Liberty denied Southwest’s claim, contending that Southwest’s covered losses did not reach its $50 million excess layer. The U.S. Court of Appeals for the Fifth Circuit previously sided with Southwest and reversed a prior grant of summary judgment in Liberty’s favor in Southwest Airlines Co. v. Liberty Ins. Underwriters, Inc., 90 F.4th 847, 850-51 (5th Cir. 2024).

Key Rulings

“But For” Causation Construed Broadly

On remand from the Fifth Circuit, the district court in January 2026 sided with Southwest when it construed the term ““but for”“ within the policy’’s definition of “loss”—which includes “costs that would not have been incurred but for a Material Interruption” and “costs to reroute or reschedule passenger travel that would not have been incurred but for a Material Interruption”—to mean “except for.” The ordinary understanding of the term and Texas law both support this construction. The district court in its recent ruling concluded that determining the meaning of the phrase was a purely legal matter appropriate for summary judgment.

Bad Faith Claim Survives

The district court held in January that, to establish bad faith, Southwest must prove that Liberty “knew or should have known it was reasonably clear that the claim was covered,” and a bona fide dispute about the insurer’s liability does not automatically rise to the level of bad faith. In its earlier opinion in the same case, the Fifth Circuit “conclude[d] 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.” Applying the mandate rule, which “compels compliance on remand with the dictates of a superior court and forecloses re-litigation of issues expressly or impliedly decided by the appellate court,” the district court refused to reconsider Liberty’s second attempt to dismiss Southwest’s bad faith claims. In so doing, the court reiterated the Fifth Circuit’s holding that insurers cannot automatically escape bad faith exposure by asserting that a coverage dispute exists.

No Independent Injury Required for Statutory Damages

Liberty argued that Southwest could not recover statutory damages or treble damages because it did not suffer any damages other than not receiving its policy benefits. Relying on Fifth Circuit precedent in Lyda Swinerton Builders, Inc. v. Oklahoma Sur. Co., 903 F.3d 435, 450-53 (5th Cir. 2018), the court concluded that “the independent-injury rule does not restrict the damages an insured can recover under the entitled-to-benefits rule” and that policyholders can obtain the amount of policy benefits as statutory damages and treble damages (if proven) without running afoul of the independent-injury rule. Under the “entitled-to-benefits” rule, “an insured who establishes a right to receive benefits under an insurance policy can recover those benefits as ‘actual damages’ under the statute if the insurer’s statutory violation causes the loss of the benefits.” The independent-injury rule does not restrict damages recoverable under the entitled-to-benefits rule but rather “limits the recovery of other damages that ‘flow’ or ‘stem’ from a mere denial of policy benefits.”

Prompt Payment Obligations Cannot Be Evaded

The court held that, on a summary judgment standard, “the insurer cannot avoid liability” under the Texas Insurance Code “by pointing after-the-fact to missing information, the absence of which did not affect the insurer’s decision.” Even though Liberty’s denial-of-coverage letter acknowledged the absence of requested information, the court found that “Liberty was able to determine that there was no coverage for the claimed loss” without that information, making it “doubtful” that the missing information “affected its no-coverage decision,” but left open the possibility that at trial it could introduce evidence on this point.

Why This Matters

This decision delivers critical wins for cyber policyholders:

• Courts in the Fifth Circuit will construe “but for” causation broadly to mean “except for,” making it easier to establish covered losses.
• According to Fifth Circuit precedent, insurers may face bad-faith liability when their denials lack reasonable basis — even if they claim a coverage dispute exists.
• Under Texas law, policyholders can recover statutory and treble damages without proving independent injury beyond lost policy benefits.
• Insurers cannot avoid prompt payment duties by invoking missing information they didn’t actually need to make their coverage decision.

Policyholders facing cyber or other coverage denials should consider whether their insurers have violated these standards.

Contacts

Josh Sohn  Partner  +1 212.590.5442  jsohn@crowell.com

Rachel Stevens  Senior Counsel  +1 212.590.5430  rstevens@crowell.com

For guidance on how this decision may affect your coverage matters, contact your Crowell & Moring attorney.