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

> Court of Appeals for the Seventh Circuit · December 9, 2021 · 20 F.4th 303

URL: https://www.frixlaw.com/law-library/cases/5133859

## Case

- **Court:** Court of Appeals for the Seventh Circuit
- **Decided:** December 9, 2021
- **Citations:** 20 F.4th 303
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Hamilton
- **Nature of suit:** civil
- **Cited by:** 74 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/5133859

## How later opinions describe it (automated extraction)

- concluding that the plaintiff failed to allege direct physical loss or damage to its property, even though the plaintiff alleged that it installed plexiglass partitions and hand sanitizer stations in the hotel to combat the COVID-19 virus
- noting that—unlike the complete physical dispossession of property in gas-infiltration cases—the plaintiff could still use its property for another purpose, despite the plaintiff’s inability to use the property for its preferred use due to the presence of the virus and closure…
- affirming the district court’s denial of leave to amend because “there [wa]s no reason to think that [the plaintiff] could have” alleged that “the virus altered the physical structures to which it attached”
- rejecting the argument that remedial measures like the installation 13 of plexiglass or special air filters demonstrate that COVID-19’s presence altered the physical 14 space of the property

## Opinion text

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/5133859. Public record. Not legal advice.