No Direct Physical Loss & Exclusion for Losses Due to Microorganisms Defeats Claim

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The COVID-19 pandemic forced numerous businesses to close their doors or to reduce operations 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 jurisdiction, we address two insurance coverage issues arising out of the partial closure of the Ritz-Carlton hotel in Dallas, Texas. In Crescent Plaza Hotel Owner, L.P. v. Zurich American Insurance Company, No. 21-1316, United States Court of Appeals, Seventh Circuit (December 9, 2021) the Seventh Circuit dealt with three Covid Cases and found no coverage and rejected creative arguments that the lawyers for the Plaintiffs raised.


Crescent filed a claim with Zurich, which denied the claim in large part as beyond the scope of the 2019 and 2020 policies’ coverage.


The first issue presented is whether Crescent has alleged direct physical loss or damage to its property. The Seventh Circuit concluded that it has not.

The Microorganism Exclusion

The microorganism exclusion appears in both the 2019 and 2020 policies that Zurich issued for Crescent’s hotel. Crescent does not dispute that its alleged losses arose from and were related to the coronavirus. The question is whether the virus qualifies as a “microorganism” under the terms of the exclusion.

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.

Fundamentally belt-and-suspenders modifications to policy language simply do not compel the inference that prior policy language did not require the same result.

In reaching this decision the Seventh Circuit adopted the analysis of today’s decision in Sandy Point Dental, P.C. v. Cincinnati Insurance Co., No. 21-1186 (7th Cir. Dec. 9, 2021). It concluded, in addition, that the microorganism exclusion in the policy independently bars coverage for the hotel’s claimed losses.


Although some of the best lawyers in the country have raised many creative attempts to get around the “direct physical loss” requirement and the microorganism exclusions like those in this case, the courts of the United States continue to properly refuse to rewrite a policy that was entered into by two sentient beings. It is essential to read the words of a policy and interpret it as the parties expected before there was a loss. The Seventh Circuit did so and ruled in the only way possible on the facts and the policy wording.

© 2021 – Barry Zalma