The opinion of the court was delivered by: Verniero, J.
On certification to the Superior Court, Appellate Division.
In this insurance litigation, plaintiff seeks payment from defendant insurer for the loss of plaintiff's commercial premises. The Appellate Division upheld the jury's verdict in favor of plaintiff. The sole issue before this Court is whether the trial court adequately instructed the jury. We hold that the trial court committed reversible error by failing to give an "increase-of-hazard" instruction. That instruction would have informed the jury that defendant could not be found liable for the loss if the fire hazard was increased by any means within the control or knowledge of plaintiff. In view of our holding, we remand the matter for a new trial.
In or about April 1993, Dynasty, Inc. ("Dynasty") was incorporated by two partners, Donald Esposito and Thomas Gatto (referred to collectively as "the partners"). In that same month, Dynasty purchased a restaurant known as "Antonio's" from The Fifth Man, Inc. ("Fifth Man"). Esposito's uncle, Jerry Esposito, owned Fifth Man. The restaurant was located on Bloomfield Avenue in Bloomfield, New Jersey. The purchase price was $150,000.
The partners jointly paid $60,000 of the purchase price in cash and gave Fifth Man a note for $90,000, which was payable over three years with eight percent interest. Dynasty and the two partners were liable on the note, which was also secured by a mortgage in favor of Fifth Man. An unrelated party, Henry Kopacz, owned the building that housed Antonio's. Kopacz agreed to assign Fifth Man's lease to the new owner.
Soon after the purchase, the partners made changes to Antonio's, essentially transforming it from a restaurant to a nightclub. As examples of the transformation, the restaurant's name was changed to "Hollywood Lights," and, in or about September 1993, the business started having male strippers perform at least once a month and started to serve primarily "finger foods." Hollywood Lights also began hosting non-alcoholic nights for teenagers.
Because the nature of the business had changed from a restaurant to that of a nightclub, the Bloomfield Fire Department required that a sprinkler system be installed on the premises at a cost of about $21,000. The system was installed in April 1994. The partners had to borrow funds to help finance the installation of the sprinkler system and seemed ill-prepared financially for that additional expenditure. Conflicts soon developed between Esposito and Gatto over the direction the club should follow. Esposito wanted a more conservative establishment to cater to an older clientele, whereas Gatto favored an approach that would appeal to a younger constituency.
The nightclub also fell into financial difficulty. Dynasty was falling behind on its loan payments, its rental payments and its accounts with its liquor suppliers. Esposito had to borrow $35,000 from a friend not only to pay part of his investment but also to pay for the sprinkler system. Dynasty never paid the sprinkler installer in full, owing the installer about $5,500 at the time of the fire. By May 1994, the financial difficulties worsened. Fifth Man, the mortgage holder, was threatening to foreclose on its mortgage and Esposito and Gatto fell further behind on the loan payments. Jerry Esposito, on behalf of the mortgagee, agreed to refinance the loan if Gatto would terminate his interest in the business. Gatto, in exchange for resigning his position with Dynasty, was released from the loan and formally resigned from the company on May 13, 1994.
With Gatto's departure, Esposito alone owned the business and ran it with help from his uncle, Jerry Esposito. Soon after Gatto left, in the weeks immediately prior to the fire, Donald Esposito changed the front door locks to the building, installed a new tile floor, repainted the inside and outside of the building, and restocked the liquor inventory.
The fire that destroyed Hollywood Lights occurred in the late evening of Sunday, June 5, 1994. According to expert testimony, the fire was intentionally set. A witness in a neighboring building testified that he heard a "roar" and that the floor beneath him shook. When he walked outside, the witness observed an unidentified blue van coming from Hollywood Lights at a high rate of speed. When firefighters arrived, they entered the building by prying open a locked, undamaged front door. That arson was the cause of the blaze appeared obvious:
firefighters found three five-gallon gasoline containers in the nightclub and noticed a strong smell of gasoline. The parties do not dispute arson as the cause of the fire.
Donald Esposito testified that he was at the movies when the fire started. He stated that he was last at Hollywood Lights on the morning of the day of the fire to look for his jacket. Esposito stated further that on his way home from the movie theater, after stopping for coffee, he drove in the direction of his residence and the club. He stopped because of the commotion and then was told that Hollywood Lights was ablaze. Esposito spoke briefly with fire investigators that evening.
The sprinkler system was found chain-locked in the "off" position at the time of the fire, thus preventing it from activating. At the time the local fire department had approved the system in April 1994, the system's control valve was locked in the "on" position. Esposito testified that the key for the valve was kept nearby in the event that someone, presumably a patron, intentionally activated the sprinkler with a cigarette lighter.
Dynasty maintained fire insurance pursuant to a policy issued by Princeton Insurance Company ("Princeton"). Due to the fire, Hollywood Lights sustained damages in the approximate amount of $244,000, which exceeded the $150,000 coverage limit in Dynasty's policy. Dynasty made a claim to Princeton for payment up to the full amount of coverage. Pursuant to the terms of the policy, the insurer required that Esposito submit to an examination under oath. During that examination, Esposito denied any complicity or knowledge in the setting of the fire and specifically denied under oath that he had turned off the sprinkler system. He admitted being in the building earlier on the day of the fire, when the building was closed, but denied bringing gasoline onto the premises.
Princeton denied the claim on the basis of its belief that the insured ordered or acquiesced in the setting of the fire. Thereafter, Dynasty instituted this action, which was tried before a jury in January 1998. Esposito testified at trial concerning the sprinkler system and his purported lack of knowledge concerning the arson, essentially mirroring his previous testimony submitted to the insurer. Princeton's theory at trial was that Esposito set the fire, or facilitated it by disabling the sprinkler system, to obtain the insurance proceeds and thus alleviate his financial burdens. The insurer supported that allegation by eliciting testimony about Dynasty's business dealings and Esposito's personal debts and by arguing that the former partner, Gatto, had nothing to gain from the arson because he had relinquished all interest in the business.
Dynasty rebutted defendant's theory by arguing that Gatto had a key to the building and may have set the fire himself as an act of vengeance. Esposito further testified that he did not increase the value of the insurance policy although he was given the chance to do so. He also asserted that although the business was in financial distress, he was working to make the club successful. (In summarizing the position of each side, we do not intend to imply wrongdoing on anyone's part.)
Dynasty's insurance policy from Princeton contains the following provision:
Conditions suspending or restricting insurance. Unless otherwise provided in writing added hereto this Company shall not be liable for loss occurring . . . . while the hazard is increased by any means within the control or knowledge of the insured . . .
That "increase-of-hazard" clause is standard language required by statute, N.J.S.A. 17:36-5.20. Pursuant to that provision, Princeton requested that the trial court instruct the jury that the insurance company would not be liable "for loss occurring while the hazard is increased by any means within the control or knowledge of the insured." More specifically, Princeton wanted jurors to be instructed that, "[i]f you find that the sprinkler system had been turned off, without justifiable reason by means within the control or knowledge of the insured through its officers or principals, there is no coverage as the same was suspended and you must find for the defendant."
The trial court rejected Princeton's requested charge. Instead, the court instructed jurors that if you find that the fire in this matter was brought about by or at the direction of or with the knowledge, consent, or acquiescence of the named insured, through its officer, Don Esposito, then there is no coverage under the insurance policy in this case.
A verdict sheet with a question similar to that instruction was also given to the jury. In rejecting Princeton's requested charge, the trial court explained that the proposed instruction was "in essence duplicative" of the charge that was given, "since any turning off of the sprinkler system by the plaintiff or anyone on his behalf regardless of whether an increase to hazard would have been a breach of the contract, because he would have started the fire in so doing." The court further noted: "It [disabling the sprinkler] would be part of the arson as far as I'm concerned. And if he [Esposito] interfered with the sprinkler system, knowing that there was going to be a fire, it's the same as if he lit it as far as I'm concerned."
After brief deliberations, the jury returned its verdict in favor of Dynasty. The trial court entered judgment against Princeton in the amount of $150,000 on January 23, 1998. Before the Appellate Division, Princeton argued that the trial court's failure to deliver the insurer's requested instruction constituted reversible error. In an unreported opinion, the Appellate Division affirmed, concluding that the trial court's charge, when read as a whole, correctly framed the factual issues to be decided by the jury. The panel was unpersuaded that the insurer's proposed charge was required because, the court reasoned, defendant's case was tried on the theory that Donald set the fire or intentionally facilitated the arson by locking off the sprinkler system. Thus, if Donald had turned off the sprinkler system, defendant did not have to pay under its policy. There was no evidence to suggest that Donald had deactivated the system negligently or for some purpose unrelated to the arson.
The Appellate Division also addressed other contentions of defendant, not pertinent to this appeal. We granted Princeton's petition for certification, 162 N.J. 198 (1999), solely to resolve the increase-of- hazard question. We now reverse.
To resolve this dispute, we must answer four related questions:
Does an intentionally-disabled sprinkler system constitute an increase of hazard? Was the charge given by the trial court duplicative of Princeton's proposed charge? Was there a basis in the evidence to sustain a separate increase-of-hazard charge? If that charge should have been given, did the court's failure to deliver the charge constitute reversible error?
We first consider whether an intentionally-disabled sprinkler system constitutes an increase of hazard within the meaning of the statute. The Appellate Division in Industrial Development Associates v. Commercial Union Surplus Lines Insurance Co., 222 N.J. Super. 281, 291- 92 (App. Div.), certif. denied, 111 N.J. 632 (1988), succinctly summarized the law in this area:
"An increase in hazard takes place when a new use is made of the insured property, or when its physical condition is changed from that which existed when the policy was written, and the new use or changed condition increases the risk assumed by the insurer." [8 George J. Couch, Cyclopedia of Insurance Law § 37A:291, at 329 (Mark S. Rhodes ed., 2d ed. rev. vol. 1985)]. An increase of hazard will generally not be found if there has been merely ". . . a casual change of a temporary character." Id. at 330. Thus, the negligence of the insured does not constitute an increase in the hazard, unless that negligence results in a change of some duration of the structure, use or occupancy of the premises. Orient Ins. Co. v. Cox,[238 S.W.2d 757, 761-62 (Ark. 1951)]; Couch, supra, § 37A:280 at 316. Whether there has been an increase of hazard suspending coverage under a policy is a question of fact which should be determined by a jury unless the evidence is so conclusive that reasonable minds could not differ. Orient Ins. Co. v. Cox, supra, 238 S.W.2d at 762; Couch, supra, § 37A:302 at 346. Moreover, the insurer bears the burden of proving that the insured has increased the hazard. Couch, supra at § 37A:305 at 352.
In applying those tenets, we must decide whether a sprinkler system locked in the off position represents a "new use" of the insured's property or a "changed condition" that has increased the risk assumed by the insurer. Although New Jersey courts have addressed the increase-of- hazard issue in other contexts, we have found no case addressing the issue on facts similar to those presented here. See, for example, Brighton v. N. River Ins. Co., 106 N.J.L. 10, 13 (Sup. Ct. 1929) (finding no increase of hazard in connection with vacant house that was prepared to be moved to another foundation because house was in that condition when policy was issued); Hodge v. Travelers Fire Ins. Co., 16 N.J. Super. 258 (App. Div. 1951) (observing that sixth bedroom may have increased hazard when house was warranted to have five bedrooms; ultimate question whether insured exercised control over hazard was for jury to decide); Asbell v. Pearl Assurance Co., 59 N.J. Super. 324 (App. Div. 1960) (finding an insured's failure to clean up debris may increase ...