Belts & Braces Exclusions Sufficient to Avoid Covid Claims


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

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.


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.

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 diminished 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 partitions and hand sanitizer stations, to display signs throughout the hotel, and to move furniture to permit social distancing.

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 argued 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. 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.”

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 sued seeking damages for breach of contract and a declaratory judgment that its losses were covered under the policies. Zurich moved to dismiss and the district court held that the phrase “direct physical loss or damage” requires either “a permanent [dispossession] of the property due to a physical change .. or physical injury to the property requiring repair.” Since Crescent could not allege either, the court granted the motion to dismiss.



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 in Crescent’s policy provides a second, independent basis for denying coverage. Although the district court did not address the exclusion,an appellate court may affirm on any basis supported by the record, so long as the opposing party had an opportunity to be heard on the issue.

Role of Exclusions

In an insurance case, the burden is initially on the insured party to show that its losses are covered. Once that showing has been made, the burden shifts to the insurer to establish that an exclusion applies. Exclusions are read narrowly and apply only if their application is clear and free from doubt.

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 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. 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. The average policyholder would be puzzled by Crescent’s theory that the exclusion bars losses caused by bacteria but not those caused by viruses.

The context in which the term “microorganism” is used in this policy confirms that the exclusion unambiguously applies to viruses. 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.

The Surplusage Argument

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. It is not surprising that a document, especially one drafted by an insurance company, would use a “belt and suspenders’ approach. In fact, insurance policies are notorious for their simultaneous use of both belts and suspenders, and some overlap is to be expected. Overlap between two exclusions in the Zurich policies does not render either superfluous.

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), and held 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. It concluded 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

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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He is available at and Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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