Facts

Plaintiffs MAK, LLC, and Mike Karimi owned a Red Lion hotel franchise. Plaintiffs were sued by the hotel franchisor, Red Lion, for breach of the franchise agreement and trademark infringement. Sequoia did not receive notice of the claim until 16 months after the lawsuit was filed. Sequoia accepted the tender of defense subject to a reservation of rights.

Before trial, Sequoia discovered that Red Lion voluntarily withdrew their trademark infringement claims, as reflected in the court's Pretrial Order. Sequoia withdrew its defense once Red Lion withdrew the trademark infringement claims, which were the only potentially covered claims under the policy. Sequoia paid for the attorney fees and costs incurred from the date of tender of the claim to the date of withdrawal of the defense, approximately $32,000.

Red Lion prevailed against plaintiffs in the underlying trial.

Plaintiffs brought a lawsuit for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of Business and Professions Code section 17200 and California Insurance Code section 790, and professional negligence and misrepresentation.

PLAINTIFF'S CONTENTIONS:
Plaintiffs contended that Sequoia had a duty to defend plaintiffs against Red Lion and should not have withdrawn its defense. Plaintiffs claimed that they were entitled to reimbursement of the pre-tender defense fees from Sequoia because notice was allegedly given to Coastal Valley, Plaintiffs' insurance broker, prior to the tender to Sequoia. Plaintiffs also sought defense fees and costs for post-withdrawal and appeal of the underlying judgment. Plaintiffs claimed that Coastal Valley was Sequoia's agent. Plaintiffs alleged that Coastal Valley was negligent in failing to tender the claim to Sequoia earlier.

DEFENDANTS' CONTENTIONS:
Sequoia contended that it was entitled to withdraw its defense after the potentially covered trademark infringement claims were withdrawn by Red Lion. Sequoia also contended that the Intra-Insured Claims Exclusion precluded coverage for the underlying action against plaintiffs because the hotel franchisor was an additional insured under the policy. Sequoia claimed that it was not responsible for the pre-tender defense fees and costs. Sequoia denied that it was vicariously liable for Coastal Valley's alleged negligence.

Coastal Valley contended that it tendered the claim when it received the complaint from plaintiffs, which was 16 months after the lawsuit was filed. Coastal Valley denied it was negligent.

Settlement Discussions

At the mandatory settlement conference, plaintiffs demanded $250,000 from Sequoia. Sequoia offered $60,000 new money. Plaintiffs demanded $60,000 from Coastal Valley Insurance and Coastal Valley Insurance offered $10,000.

Result

The court granted Sequoia's motion for directed verdict on all grounds except the Intra-Insured Claims Exclusion as a basis for finding no coverage. The court also granted Coastal Valley's motion for directed verdict, except for the negligence cause of action, which was submitted to the jury. The jury returned a verdict for plaintiffs and awarded damages in the amount of $44,713. The jury also found that plaintiffs were 70 percent comparatively negligent. The net award of damages for plaintiffs was $13,414. The jury found Coastal Valley 30 percent negligent.

Other Information

FILING DATE: Oct. 29, 2010.

Length

six days