Crescent Plaza Hotel Owner, L. v. Zurich American Insurance Com

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 21-1316

CRESCENT PLAZA HOTEL OWNER, L.P.,

Plaintiff-Appellant,

v.

ZURICH AMERICAN INSURANCE COMPANY,

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 1:20-cv-03463 — Robert W. Gettleman, Judge.

____________________

ARGUED SEPTEMBER 10, 2021 — DECIDED DECEMBER 9, 2021

____________________

Before MANION, WOOD, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge. The COVID-19 pandemic forced

numerous businesses to close their doors or to reduce opera-

tions temporarily. Many suffered severe economic losses as a

result and have sought money under their business property

insurance policies. In this case under our diversity jurisdic-

tion, we address two insurance coverage issues arising out of

the partial closure of the Ritz-Carlton hotel in Dallas, Texas.

First, we adopt the analysis of today’s decision in Sandy Point

2 No. 21-1316

Dental, P.C. v. Cincinnati Insurance Co., No. 21-1186 (7th Cir.

Dec. 9, 2021), and hold that the term “direct physical loss or

damage” to property does not apply to a business’s loss of use

of the property without any physical alteration. Second, we

conclude that the microorganism exclusion in the policy here

independently bars coverage for the hotel’s claimed losses.

I. Facts and Procedural History

A. The COVID-19 Pandemic and Closure Orders

As the COVID-19 pandemic was spreading in the United

States in March 2020, the Dallas County government issued

several orders restricting the operations of local businesses.

On March 21, the county prohibited in-person dining and or-

dered the closure of gyms, fitness centers, and spas, among

other businesses. Three days later, another order closed all

nonessential businesses and instructed residents to shelter in

place. Hotels were permitted to continue to provide lodging,

as well as delivery and take-out food services, subject to com-

pliance with social-distancing rules.

Plaintiff Crescent Plaza Hotel Owner, L.P. owns the Ritz-

Carlton in Dallas. The hotel offers guest rooms and suites, a

restaurant and bar, general event space, and other amenities,

including a salon, spa, and fitness center. Crescent alleges that

COVID-19 rendered the air in the hotel unsafe and dimin-

ished the functional space available on the premises, causing

significant losses of business income. Crescent also alleges

that it was required to incur expenses to install plexiglass par-

titions and hand sanitizer stations, to display signs through-

out the hotel, and to move furniture to permit social distanc-

ing.

No. 21-1316 3

B. The Insurance Policy

Defendant Zurich American Insurance Company issued a

general business property insurance policy to Marriott

International—the operator of the hotel—for the period of

April 1, 2019 to April 1, 2020. Crescent is an additional insured

under the terms of the policy. It argues that its losses are

covered under several different provisions, nearly all of

which require “direct physical loss or damage” to covered

property. Zurich also issued another one-year policy to

Marriott—again including Crescent as an additional

insured—that took effect on April 1, 2020. That policy was

largely identical to the 2019 version, but it added an exclusion

for losses attributable to any communicable disease,

including viruses. Crescent has not offered on appeal any

reason to doubt that this exclusion bars coverage under the

2020 policy. And both policies include a microorganism

exclusion, which bars coverage for losses “directly or

indirectly arising out of or relating to: mold, mildew, fungus,

spores or other microorganism of any type, nature, or

description, including but not limited to any substance whose

presence poses an actual or potential threat to human health.”

C. District Court Proceedings

Crescent filed a claim with Zurich, which denied the claim

in large part as beyond the scope of the 2019 and 2020 policies’

coverage. Crescent then filed a complaint in the Northern Dis-

trict of Illinois seeking damages for breach of contract and a

declaratory judgment that its losses were covered under the

policies. Zurich moved to dismiss under Federal Rule of Civil

Procedure 12(b)(6) for failure to state a claim. The district

court held that the phrase “direct physical loss or damage”

requires either “a permanent [dispossession] of the property

4 No. 21-1316

due to a physical change … or physical injury to the property

requiring repair.” Crescent Plaza Hotel Owner, L.P. v. Zurich

American Insurance Co., 520 F. Supp. 3d 1066, 1070 (N.D. Ill.

2021). Since Crescent could not allege either, the court granted

the motion to dismiss. We affirm the dismissal.

II. Discussion

A. Legal Standard

We review de novo, meaning without deference, a district

court’s grant of a motion to dismiss for failure to state a claim.

Ochoa v. State Farm Life Insurance Co., 910 F.3d 992, 994 (7th

Cir. 2018). We accept the allegations in the complaint as true,

and we draw all reasonable inferences in favor of the plaintiff.

Bilek v. Federal Insurance Co., 8 F.4th 581, 584 (7th Cir. 2021).

Yet the complaint must still include “enough facts to state a

claim to relief that is plausible on its face.” Bell Atlantic Corp.

v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausi-

ble “when the plaintiff pleads factual content that allows the

court to draw the reasonable inference that the defendant is

liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S.

662, 678 (2009). This standard requires that the plaintiff show

“more than a sheer possibility” of liability, but it “is not akin

to a ‘probability requirement.’” Id., quoting Twombly, 550 U.S.

at 556.

Crescent’s claims arise under state law, and the parties

agree that Illinois law applies. In Illinois, “An insurance policy

is a contract, and the general rules governing the interpreta-

tion of other types of contracts also govern the interpretation

of insurance policies.” Windridge of Naperville Condominium

Ass’n v. Philadelphia Indemnity Insurance Co., 932 F.3d 1035,

1039 (7th Cir. 2019), quoting Hobbs v. Hartford Insurance Co. of

No. 21-1316 5

the Midwest, 823 N.E.2d 561, 564 (Ill. 2005). The court’s func-

tion is “to ascertain and give effect to the intention of the par-

ties, as expressed in the policy language.” Thounsavath v. State

Farm Mutual Automobile Insurance Co., 104 N.E.3d 1239, 1244

(Ill. 2018). If the policy is unambiguous, its terms must be ap-

plied as written. Id. Ambiguity exists if the language of the

policy is subject to more than one reasonable interpretation,

as applied to the dispute before the court. Founders Insurance

Co. v. Munoz, 930 N.E.2d 999, 1004 (Ill. 2010). But disagree-

ment between the parties as to meaning does not itself make

the policy ambiguous, and the court “will not strain to find an

ambiguity where none exists.” Id. Our inquiry here focuses on

whether the terms are ambiguous as applied to the allegations

before us. Windridge, 932 F.3d at 1039–40.

B. Coverage

The first issue presented is whether Crescent has alleged

direct physical loss or damage to its property. For the reasons

explained in today’s decision in Sandy Point Dental, No. 21-

1186, slip op. at 7–14, we conclude that it has not. 1

1 The parties agree that Crescent is entitled to recover for its losses

under the 2019 policy’s coverage for cancellation of bookings. That provi-

sion covered losses resulting from “the cancellation of, and/or inability to

accept bookings or reservations for accommodation,” and it applied if

those losses were “a direct result of … [the] outbreak of contagious and/or

infectious disease as well as restrictive guidance or travel advisories

placed on a region or area by Centers for Disease Control, World Health

Organization, or comparable authority.” Zurich conceded in the district

court that it would pay for those losses up to the policy’s applicable

$5,000,000 limit. We take Zurich at its word, and we assume the district

court could use its authority under Rule 60(b) if problems arise.

6 No. 21-1316

C. Exclusions

The microorganism exclusion in Crescent’s policy pro-

vides a second, independent basis for denying coverage. Al-

though the district court did not address the exclusion, we

may affirm on any basis supported by the record, so long as

the opposing party had an opportunity to be heard on the is-

sue. In re Airadigm Communications, Inc., 616 F.3d 642, 652 (7th

Cir. 2010). Here, Zurich raised the issue in its motion to dis-

miss and Crescent responded, and the parties’ appellate briefs

address the issue fully.

1. Role of Exclusions

In an insurance case, the burden is initially on the insured

party to show that its losses are covered. Addison Insurance Co.

v. Fay, 905 N.E.2d 747, 752 (Ill. 2009). Once that showing has

been made, the burden shifts to the insurer to establish that

an exclusion applies. Id. Exclusions are read narrowly and ap-

ply only if their application is “clear and free from doubt.”

Scottsdale Insurance Co. v. Columbia Insurance Group, Inc., 972

F.3d 915, 919 (7th Cir. 2020), quoting National Fire Insurance of

Hartford v. Walsh Construction Co., 909 N.E.2d 285, 288 (Ill.

App. 2009).

2. The Microorganism Exclusion

The microorganism exclusion appears in both the 2019

and 2020 policies that Zurich issued for Crescent’s hotel. The

exclusion bars coverage for losses “directly or indirectly aris-

ing out of or relating to: mold, mildew, fungus, spores or

other microorganism of any type, nature, or description, in-

cluding but not limited to any substance whose presence

poses an actual or potential threat to human health.” Crescent

does not dispute that its alleged losses arose from and were

No. 21-1316 7

related to the coronavirus. The question is whether the virus

qualifies as a “microorganism” under the terms of the exclu-

sion. We hold that it does.

a. Dictionary Definitions

Since the term “microorganism” is not defined in the pol-

icy, we construe it as an ordinary reader or policyholder

would. Gillen v. State Farm Mutual Automobile Insurance Co.,

830 N.E.2d 575, 582 (Ill. 2005). Dictionaries can provide useful

guides to ordinary meanings of terms, and many dictionaries

include viruses within their definitions of “microorganism.”

E.g., Microorganism, New Oxford American Dictionary (3d ed.

2010) (“a microscopic organism, especially a bacterium, virus,

or fungus”); Microorganism, Webster’s New World College

Dictionary (5th ed. 2020) (“any microscopic or ultramicro-

scopic animal, plant, bacterium, virus, etc.”); see also Microor-

ganism, Webster’s Third New International Dictionary (unabr.

ed. 1993) (including “virus” as a synonym of “microorgan-

ism”); Microbiology, Britannica, https://www.britan-

nica.com/science/microbiology (last visited Dec. 9, 2021) (list-

ing viruses as one of “[t]he major groups of microorgan-

isms”).

It is true, as Crescent points out, that other dictionary def-

initions of “microorganism” do not mention viruses. E.g., Mi-

croorganism, Merriam-Webster Online, https://www.merriam-

webster.com/dictionary/microorganism (last visited Dec. 9,

2021) (“an organism (such as a bacterium or protozoan) of mi-

croscopic or ultramicroscopic size”); see also “Virus” vs. “Bac-

teria”: What’s the Difference?, Dictionary.com,

https://www.dictionary.com/e/virus-vs-bacteria (last visited

Dec. 9, 2021) (“Because viruses aren’t technically alive, they

also aren’t technically microorganisms.”). We also assume for

8 No. 21-1316

purposes of this appeal that, as Crescent argues, there is “con-

siderable disagreement” among biologists as to whether vi-

ruses are appropriately categorized as microorganisms for

various scientific purposes.

But identifying competing dictionary definitions and de-

bate among experts is not necessarily enough to render the

exclusion ambiguous. See, e.g., Cincinnati Insurance Co. v.

Flanders Electric Motor Service, Inc., 40 F.3d 146, 152 (7th Cir.

1994) (“The existence of multiple dictionary definitions does

not compel the conclusion that a term is ambiguous.”). Nor is

Crescent’s assertion that viruses—unlike mold, fungi, and the

other categories specifically listed in the exclusion—are not

alive and do not have cells. The question is how an ordinary

reader or policyholder, not a scientist, would understand the

term as used in the policy. Courts are not to adopt “an inter-

pretation which rests on ‘gossamer distinctions’ that the aver-

age person, for whom the policy is written, cannot be ex-

pected to understand.” Founders, 930 N.E.2d at 1004, quoting

Canadian Radium & Uranium Corp. v. Indemnity Insurance Co. of

North America, 104 N.E.2d 250, 255 (Ill. 1952). An ordinary

reader, unversed in the nuances of classification debates in

microbiology, would be unlikely to home in on viruses’ lack

of cellular structure to decide whether losses they cause fall

under the exclusion. We also expect that the average policy-

holder would be puzzled by Crescent’s theory that the exclu-

sion bars losses caused by bacteria but not those caused by

viruses. We have trouble imagining why parties might draw

that line on the scope of the exclusion.

b. Context

The context in which the term “microorganism” is used in

this policy confirms that the exclusion unambiguously

No. 21-1316 9

applies to viruses. In many cases, “the linguistic and the func-

tional contexts of words offer better clues to meaning than do

dictionaries.” Public Hospital of Town of Salem v. Shalala, 83 F.3d

175, 177 (7th Cir. 1996). It may be possible to use the term “mi-

croorganism” in a narrower sense that does not include vi-

ruses, as some of Crescent’s cited dictionaries do, but that is

not how the term is used in context in this policy.

Instead, the context and language signal clearly that the

exclusion applies to losses caused by viruses. The relevant

language is deliberately broad, covering microorganisms “of

any type, nature, or description,” and applying broadly to

“any substance whose presence poses an actual or potential

threat to human health,” which the coronavirus undeniably

does. Rather than attempting to list every conceivable exam-

ple of a microorganism, Zurich used broad language that a

reasonable reader would understand to include viruses. The

breadth of that language does not render the exclusion am-

biguous. See Platinum Supplemental Insurance, Inc. v. Guarantee

Trust Life Insurance Co., 989 F.3d 556, 571–72 (7th Cir. 2021)

(observing that language in a contract is not ambiguous

simply because it is broad).

c. The Surplusage Argument

Crescent also supports its argument by relying on a sepa-

rate policy provision—the biological or chemical materials ex-

clusion. If the microorganism exclusion applied to losses

caused by viruses, Crescent argues, there would have been no

need to include the biological or chemical materials exclusion

in the policy. This argument is not persuasive. The biological

or chemical materials exclusion bars coverage for losses con-

nected to “the actual or threatened malicious use of patho-

genic or poisonous biological or chemical materials.”

10 No. 21-1316

Crescent asserts that this language “contemplates viruses”

and thus would be rendered superfluous if the microorgan-

ism exclusion were also read to include viruses. Not at all. The

category of “pathogenic or poisonous biological or chemical

materials” encompasses substances—cyanide or sarin gas, for

example—that plainly would not be understood as microor-

ganisms. That exclusion, therefore, would still be doing work

of its own regardless of whether viruses qualify as microor-

ganisms. That exclusion is also limited to “malicious” uses of

such materials, rendering it inapplicable to this global pan-

demic. 2

More fundamental, Crescent’s surplusage argument

overlooks the fact that insurance policies often use

overlapping provisions to provide greater certainty on the

scope of coverages and exclusions. See Great West Casualty Co.

v. Robbins, 833 F.3d 711, 718 (7th Cir. 2016); see also Citizens

Insurance Co. v. Risen Foods, LLC, 880 F.3d 73, 79 (2d Cir. 2018)

(“It is not surprising that a document, especially one drafted

by an insurance company, would use a ‘belt and suspenders’

approach….”); Certain Interested Underwriters at Lloyd’s,

London v. Stolberg, 680 F.3d 61, 68 (1st Cir. 2012) (“insurance

policies are notorious for their simultaneous use of both belts

and suspenders, and some overlap is to be expected”); TMW

Enterprises, Inc. v. Federal Insurance Co., 619 F.3d 574, 577 (6th

Cir. 2010) (noting that “redundancies abound” in insurance

2We see some tension in Crescent’s view that the phrase “pathogenic

or poisonous biological or chemical materials” is broad enough to encom-

pass viruses, while “microorganism of any type, nature, or description” is

not. As Crescent acknowledges in the context of the biological or chemical

materials exclusion, a policy exclusion might use broad language that en-

compasses viruses without specifically mentioning them.

No. 21-1316 11

contracts and that the belt-and-suspenders approach to

drafting is common). That practice makes good sense for both

coverage language and exclusion language. Once the insured

party has made an initial showing of coverage, the insurer

bears the burden of establishing that an exclusion applies. A

prudent insurer will try to remove any doubt that certain

categories of losses are excluded, which may lead to overlap

between different provisions. “Some redundancy in

insurance contracts is normal, while construing an

endorsement to be completely superfluous is not.” Great West,

833 F.3d at 717–18 (internal citation omitted). Some overlap

between these two exclusions in the Zurich policies does not

render either superfluous.

Finally, Crescent argues that Zurich’s addition of the

communicable-disease exclusion to the 2020 policy amounted

to a tacit admission that the 2019 policy did not exclude losses

caused by viruses. We reject this argument for similar reasons.

As the pandemic spread and disputes were arising on the

scope of insurance coverage, it was sensible for Zurich to

make even clearer to policyholders that losses arising from

COVID-19 would not be covered. We have recognized that

revising language in an insurance policy does not constitute

an admission that an alternative interpretation of the original

language was correct. See Pastor v. State Farm Mutual

Automobile Insurance Co., 487 F.3d 1042, 1045 (7th Cir. 2007)

(“to use at a trial a revision in a contract to argue the meaning

of the original version would violate Rule 407 of the Federal

Rules of Evidence, the subsequent-repairs rule”). More

fundamental, though, such belt-and-suspenders

modifications to policy language simply do not compel the

inference that prior policy language did not require the same

result.

12 No. 21-1316

The judgment of the district court is AFFIRMED.