Qexcelsior Italia Srl v. Zurich American Insurance Company

United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued January 10, 2024
Decided March 20, 2024
Before
DIANE S. SYKES, Chief Judge
DAVID F. HAMILTON, Circuit Judge
JOHN Z. LEE, Circuit Judge
No. 23-1451
Q EXCELSIOR ITALIA SRL,
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. 1:21-cv-01166
Martha M. Pacold,
Judge.
O R D E R
Plaintiff Q Excelsior Italia, the owner of the Westin Excelsior Rome hotel, has
sued its insurer, defendant Zurich American Insurance Company, alleging wrongful
denial of coverage for losses the hotel suffered in the early weeks of the COVID-19
pandemic. Defendant Zurich moved to dismiss under Federal Rule of Civil Procedure
12(b)(6) for failure to state a claim. The district court granted Zurich’s motion in all
NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with FED. R. A PP. P. 32.1

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relevant parts, and plaintiff Q Excelsior has appealed.1 Our prior decisions in Crescent
Plaza Hotel Owner, L.P. v. Zurich American Insurance Co., 20 F.4th 303 (7th Cir. 2021), and
Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 20 F.4th 327 (7th Cir. 2021), affirmed
dismissal of nearly identical claims of wrongful denial of coverage. Crescent Plaza dealt
with nearly identical claims by a hotel owner and even interpreted the same policy—
not just the same policy form, but the same policy—at issue here. Our decisions in those
cases foreclose Q Excelsior’s arguments and control our decision. We affirm the district
court’s dismissal.
The Westin Excelsior Rome is a luxury hotel in central Rome, Italy. In March
2020, in response to the COVID-19 pandemic, the Italian government issued a series of
orders suspending non-essential activities and limiting movement to “approved work,
health or urgent needs.” Other nations imposed similar orders restricting travel or
imposing quarantines on travelers coming to and from Italy. Although the Italian
government’s orders did not mandate that hotels close, plaintiff’s hotel bookings
dropped to virtually zero, as most guest bookings were cancelled in response to the
pandemic and new bookings ceased to be made.
Q Excelsior was an insured under a commercial property insurance policy issued
by Zurich to hotel giant Marriott International. Q Excelsior alleges that it submitted two
insurance claims for the lost business income and extra expenses it incurred due to the
pandemic and that Zurich did not respond to either claim. Q Excelsior interpreted
Zurich’s failure to respond to mean that it did not intend to cover Q Excelsior’s losses
and filed this suit seeking damages for Zurich’s alleged breach of the policy and a
declaratory judgment that the policy provides coverage.
Zurich argues that Q Excelsior’s claims under the policy fail for two independent
reasons: (1) plaintiff fails to allege “direct physical loss,” and (2) the Microorganism
Exception independently bars its claims.
Considering first the question of direct physical loss, Zurich contends that Q
Excelsior cannot satisfy the policy requirement to show that COVID-19 caused “direct
physical loss or damage” to the hotel. In response, Q Excelsior argues that it has
sufficiently pled a “direct physical loss” by alleging a “complete physical
dispossession” of its property due to COVID-19, an argument it contends was left open
by Sandy Point Dental. Q Excelsior claims the district court erred by finding that circuit
1 The district court denied the motion only as to Q Excelsior’s claim for coverage under a provision
of the insurance policy concerning cancelled bookings. Q Excelsior later voluntarily dismissed that claim.

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precedent “categorically forecloses a plaintiff from showing complete physical
dispossession … through allegations that SARS-CoV-2 rendered a property
uninhabitable.”
Plaintiff’s theory fails on two independent grounds. First, Q Excelsior failed to
develop its “complete physical dispossession” argument in the district court, forfeiting
the theory for appeal. “Dispossession” and “dispossess” are found nowhere in
plaintiff’s complaint and only once in Q Excelsior’s opposition to Zurich’s motion to
dismiss, in a single sentence quoting from Sandy Point Dental.
Second, even if we overlooked Q Excelsior’s forfeiture of this complete
dispossession theory, it would immediately run aground on Sandy Point. Our opinion in
Sandy Point left open the possibility that some “loss of use, unaccompanied by any
physical alteration to property, might be so pervasive as effectively to qualify as a
complete physical dispossession of property and thus a ‘direct physical loss.’” 20 F.4th
at 334. When that passage is read in context, however, it is evident that we intended to
keep the door open for “complete physical dispossession” only in situations of true
uninhabitability, like gas leaks or noxious fumigation. See id. at 334–35 (noting that,
unlike gas infiltration, where contamination makes “physical entry impossible, thus
barring all uses by all persons,” the COVID-19 virus’s “impact on physical property is
inconsequential: deadly or not, it may be wiped off surfaces using ordinary cleaning
materials, and it disintegrates on its own in a matter of days”); accord, Sweet Berry Café,
Inc. v. Society Insurance, Inc., 2022 IL App (2d) 210088, 193 N.E.3d 962, 974 (affirming
dismissal of similar claims by restaurant and distinguishing asbestos and noxious gas
cases because, “unlike a noxious gas, … the virus’s presence is easily remediated by
routine, not specialized or costly, cleaning and disinfecting or will die off after a few
days”).
Q Excelsior seeks to avoid Sandy Point Dental by arguing that it did more than
that plaintiff to allege that its hotel was rendered entirely “uninhabitable” by COVID-
19. The argument is simply not correct. Q Excelsior’s own allegations undercut its
theory of “complete physical dispossession” due to COVID-19. Q Excelsior alleged
repeatedly in its amended complaint that the Westin Excelsior Rome was authorized to
and did remain open for business during the pandemic. It “employ[ed] additional
security staff … ensuring only staff and guests with green passes entered the premises”
and implemented new sanitation, cleaning, and social distancing measures to keep
hotel guests and staff safe and to “continue operations as normally as possible.” Far
from being sufficient to establish a theory of complete physical dispossession or

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uninhabitability, Q Excelsior’s allegations reveal the same theory of diminished use that
we rejected in Sandy Point Dental. See 20 F.4th at 334.
The district court was correct that our case law categorically forecloses
Q Excelsior’s argument that a mere “loss of functionality” due to the presence of
COVID-19 and related government closure orders can show “complete physical
dispossession.” In Sandy Point Dental and other cases, we have held repeatedly that
allegations of diminished use cannot amount to direct physical loss under a property
insurance policy. See Sandy Point Dental, 20 F.4th at 334 (“Without any physical
alteration to accompany it, … partial loss of use does not amount to a ‘direct physical
loss.’”); Paradigm Care & Enrichment Center, LLC v. West Bend Mutual Insurance Co., 33
F.4th 417, 421 (7th Cir. 2022) (“We held with respect to Illinois law that the phrase
‘direct physical loss’ in a commercial property insurance policy requires a physical
alteration to property—that is, some alteration in appearance, shape, color or other
material dimension.”) (internal quotation and alteration marks omitted). Q Excelsior
has not offered any plausible distinction between its allegations here and the
insufficient allegations in those cases.2
As a second, independent grounds for dismissing Q Excelsior’s case, Zurich
contends that the policy’s Microorganism Exclusion also defeats coverage under the
policy. That exclusion 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.” In Crescent Plaza, involving another hotel
insured under the same Zurich policy, we held that the exclusion “independently
bar[red] coverage for the hotel’s claimed losses.” 20 F.4th at 306. The district court
correctly considered itself bound by Crescent Plaza’s holding that “the term
‘microorganism’” in the exclusion “unambiguously applies to viruses.” Q Excelsior, 2022
WL 17093361, at *4 (N. D. Ill. Nov. 21, 2022), quoting Crescent Plaza, 20 F.4th at 309–10.
The Microorganism Exclusion therefore “provides a second, independent basis for
denying coverage” in this case, as it did in Crescent Plaza. See 20 F.4th at 308.
2 Since our holdings in Crescent Plaza and Sandy Point Dental, we have repeatedly resolved similar
COVID-19 coverage appeals with non-precedential orders, underscoring that the questions raised by Q
Excelsior are neither new nor unresolved. See, e.g., Windy City Limousine Co., LLC v. Cincinnati Fin. Corp.,
No. 21-3296, 2022 WL 1965903, at *1 (7th Cir. June 6, 2022); Green Beginnings, LLC v. West Bend Mutual
Insurance Co., No. 21-2186, 2022 WL 1700139, at *1 (7th Cir. May 27, 2022).

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We decline Q Excelsior’s invitation to overrule Crescent Plaza on the theory that
its Erie Railroad prediction of Illinois law was incorrect. The Illinois Appellate Court has
repeatedly rejected arguments that the COVID-19 virus caused direct physical loss or
damage. See, e.g., Lee v. State Farm Fire & Casualty Co., 2022 IL App. (1st) 210105, ¶ 16,
205 N.E.3d 915, 919 (expressly agreeing with Seventh Circuit’s Erie Railroad prediction
in Sandy Point Dental on the scope of “direct physical loss”). The Illinois Supreme Court
has repeatedly declined opportunities to overrule state appellate courts that have
arrived at the same conclusions.3 For those same reasons, we also deny Q Excelsior’s
request that we certify the question to the Illinois Supreme Court. See Nat’l Cycle, Inc. v.
Savoy Reinsurance Co. Ltd., 938 F.2d 61, 64 (7th Cir. 1991) (“[T]he right time to certify a
question is before the first federal decision on the point. Certification eliminates the
need to expend judicial resources predicting how another court will decide a question.
Once we have invested the time and effort to make the prediction, the costs have been
sunk.”).
The judgment of the district court is AFFIRMED.
3 At least fourteen cases on property insurance coverage for COVID-19 losses have received final
decisions from the Illinois appellate courts, all declining to find coverage. See, e.g., Sweet Berry Café, 2022
IL App (2d) 210088, ¶ 1, 193 N.E.3d 962; Lee, 2022 IL App. (1st) 210105, ¶ 25, 205 N.E.3d 915; Alley 64, Inc.
v. Society Insurance, 2022 IL App (2d) 210401, ¶ 103, 206 N.E.3d 1109; Firebirds International, LLC v. Zurich
American Insurance Co., 2022 IL App (1st) 210558, ¶ 45, 208 N.E.3d 1187; see also Tom Baker, Appeals in
Business Interruption Cases, Covid Coverage Litigation Tracker, Penn Carey Law School at the University of
Pennsylvania, https://cclt.law.upenn.edu/appeals/ (last visited Mar. 7, 2024).

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