Filed 6/17/14 Yu v. Sequoia Ins. Co. CA4/3




                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.


              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FOURTH APPELLATE DISTRICT

                                                DIVISION THREE


BANN-SHIANG LIZA YU,

     Plaintiff and Appellant,                                          G046603 (cons. with G046698)

         v.                                                            (Super. Ct. No. 30-2010-00393023)

SEQUOIA INSURANCE COMPANY,                                             OPINION

     Defendant and Appellant.



                   Appeal from a judgment of the Superior Court of Orange County, Thierry
Patrick Colaw, Judge. Reversed.
                   Mohammed K. Ghods and William A. Stahr for Plaintiff and Appellant.
                   Hayes Scott Bonino Ellingson & McLay, Mark G. Bonino, Stephen M.
Hayes and Richard A. Dana for Defendant and Appellant.
                                          *                  *                  *
              Plaintiff Bann-Shiang Liza Yu (Yu) appeals from the judgment entered in
favor of defendant Sequoia Insurance Company (Sequoia) in this insurance bad faith
action, which alleged Sequoia improperly denied Yu’s tender seeking a defense in the
underlying lawsuit. Although the trial court determined the operative pleading in the
underlying lawsuit included allegations triggering the duty to defend, the court concluded
Sequoia nonetheless had no duty to defend because that lawsuit involved a claim by one
insured against another insured and a policy exclusion therefore barred coverage. Yu
appealed the trial court’s determination the exclusion applied, and Sequoia
cross-appealed the court’s conclusion the allegations in the underlying lawsuit would
have triggered the duty to defend, but for the exclusion.
              We reverse. Although the trial court correctly found a duty to defend
arising from the operative pleading in the underlying lawsuit, the court erred in applying
the intra-insured claims exclusion to defeat that duty.

                                               I

                            FACTS AND PROCEDURAL HISTORY

              Yu is the owner of an Anaheim hotel that initially operated as a
Candlewood Suites through a licensing agreement (Licensing Agreement) with Holiday
Hospitality Franchising, Inc. (HHF). HHF previously had entered into a master
agreement with Six Continents, Inc. (Six Continents) which entitled HHF “to license
Proprietary Rights for use in Candlewood Suites® hotels and . . . succeed[] to the rights
of Candlewood and [Six Continents] with respect to [the Licensing Agreement with
Yu].”
              Sequoia issued Yu a general liability insurance policy (Policy) covering all
claims arising from hotel operations, including claims for “advertising injury,” defined as
“[t]he use of another’s advertising idea in your ‘advertisement’; or [¶] . . . [i]nfringing
upon another’s copyright, trade dress or slogan in your ‘advertisement’.”


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              The Licensing Agreement required Yu to name HHF as an “additional
insured” by using a standard endorsement added to her general liability policy.
Consequently, the Policy included endorsement CG2026, which listed HHF as an
additional insured. Two other endorsements, discussed below, also were part of the
Policy and specifically limited the circumstances in which HHF would qualify as an
additional insured.
              On November 18, 2008, HHF notified Yu it was terminating the Licensing
Agreement effective November 20, 2008, because of “multiple ongoing uncured defaults
in the operation of the . . . hotel.” The termination letter cited two specific defaults:
noncompliant bed linens and failure to provide copies of fire alarm reports. On
November 20, 2008, HHF and Six Continents sued Yu in federal district court in Kansas
(Kansas Lawsuit) for trademark infringement, injunctive relief, and damages, alleging Yu
continued to use the Candlewood Suites trademark after termination of the Licensing
Agreement.
              On February 10, 2009, HHF and Six Continents filed an amended
complaint in the Kansas Lawsuit that omitted the claims for trademark infringement and
injunctive relief, and instead alleged a single claim by HHF for breach of the Licensing
Agreement. Though Six Continents was still a nominal party, it alleged no claim for
relief.
              The amended complaint acknowledged the Licensing Agreement required
mediation before the litigation could proceed, and specifically addressed the issue of
trademark infringement: “Ms. Yu was obligated to cease all use of all Proprietary Rights
as of 3:00 p.m. Eastern Standard Time (Noon, Pacific Standard Time) on November 20,
2008 and appears to have removed or modified exterior signage in a reasonably timely
manner thereafter; however, as of the date of this Amended Complaint, Licensor has not
been able to secure access to the Hotel in order to confirm that all use of Proprietary
Rights has ceased. Accordingly, pending access or discovery procedures resulting in

                                               3
access, Licensor reserves the right to further amend this Amended Complaint in order to
restore claims for trademark infringement under the trademark laws of the United States.”
              Despite dropping the cause of action for trademark infringement, the
amended complaint continued to specifically request damages for trademark infringement
in the prayer for relief: “Failing resolution by mediation, plaintiff Holiday Hospitality
Franchising, Inc., asks this Court to enter judgment in its favor: [¶] A. The amount of
unpaid fees and royalties due as of the date of termination but not paid, as established by
proof following discovery; [¶] B. Liquidated damages as provided in the License; and
[¶] C. Its costs and expenses, including attorneys’ fees as provided by the License; and
that it be awarded such other, further or different relief as the Court deems just and
proper, including but not limited to relief under the trademark laws of the United States
in the event it appears that Licensee did not fully and completely cease all use of the
Proprietary Marks following termination.” (Italics added.)
              On February 23, 2009, Yu tendered defense of the Kansas Lawsuit to
Sequoia. Within days, Sequoia sent Yu a letter declining the tender. Sequoia stated in
the letter it had no duty to defend Yu because (1) the amended complaint contained no
covered claim, and (2) a policy exclusion for “injury to an insured” applied. Yu therefore
provided her own defense in the Kansas Lawsuit and eventually negotiated a settlement
that required HHF to pay Yu $100,000 for a mutual general release of all claims the two
parties had against one another.
              After settling the Kansas Lawsuit, Yu filed this action against Sequoia for
insurance bad faith. The trial court bifurcated the action and conducted a two-day bench
trial on the duty to defend. At the end of the first phase, the trial court entered judgment
for Sequoia because it concluded Sequoia had no duty to defend Yu in the Kansas
Lawsuit. In a lengthy statement of decision, the trial court explained there was a
“‘potential for coverage’ triggered by the allegations of the HHF Amended Complaint,”
but Sequoia had no duty to defend the Kansas Lawsuit because HHF qualified as an

                                              4
insured under the Policy and the Policy’s “Intra-Insured Claims” exclusion therefore
applied to bar coverage. Regarding Six Continents, the trial court also concluded
Sequoia had no duty to defend because Six Continents did not allege any claims against
Yu in the Kansas Lawsuit, but merely was included in the caption as a nominal party.1
              The trial court entered judgment in Sequoia’s favor and Yu appealed,
challenging the finding the Intra-Insured Claims exclusion applied. Sequoia filed a
protective cross-appeal, contesting the trial court’s determination the underlying claim
created a potential for coverage that triggered the duty to defend.

                                              II

                                        DISCUSSION

A.     Standard of Review
              The appeal and cross-appeal challenge trial court rulings interpreting the
provisions of an insurance policy. We review such rulings under the de novo standard of
review. (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470
(E.M.M.I.); Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264 [“While
insurance contracts have special features, they are still contracts to which the ordinary
rules of contractual interpretation apply”].) Whether policy language is ambiguous is
also a question of law subject to de novo review. (Producers Dairy Delivery Co. v.
Sentry Ins. Co. (1986) 41 Cal.3d 903, 912.)




       1      Yu does not challenge the trial court’s ruling Six Continents did not allege
any claims in the Kansas Lawsuit that could give rise to a duty to defend. Accordingly,
we do not discuss Six Continents any further in this opinion and simply note our
conclusion HHF does not qualify as an insured under the Intra-Insured Claims exclusion
applies with equal force to Six Continents.


                                              5
B.     The Trial Court Properly Found a Potential for Coverage Under the Policy
              In resolving the question whether a duty to defend exists, the insurer bears a
greater burden than the insured. (Montrose Chemical Corp. v. Superior Court (1993)
6 Cal.4th 287, 300 (Montrose).) The insured has the initial burden to make a prima facie
showing the third party claim potentially falls within the policy’s coverage. (Id. at
pp. 300, 304; Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1188.) The
burden then shifts to the insurer to conclusively show the claim cannot fall within the
policy’s coverage. (Montrose, at pp. 300, 304.)
              “‘[T]he insurer’s duty [to defend] is not measured by the technical legal
cause of action pleaded in the underlying third party complaint, but rather by the
potential for liability under the policy’s coverage as revealed by the facts alleged in the
complaint or otherwise known to the insurer.’ [Citation.]” (Hudson Ins. Co. v. Colony
Ins. Co. (9th Cir. 2010) 624 F.3d 1264, 1267 quoting CNA Casualty of California v.
Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 606 (original italics); Barnett v.
Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 510.) “Any doubt as to whether the
facts establish the existence of the defense duty must be resolved in the insured’s favor.”
(Montrose, supra, 6 Cal.4th at pp. 299-300.)
              Here, the trial court found the factual allegations in the Kansas Lawsuit
amended complaint triggered a duty to defend: “While the HHF Amended Complaint
withdrew the specific language that was contained in the original complaint that would
have unquestionably triggered coverage concerning an advertising injury, the plaintiff in
the underlying Kansas action still hedged its language in the HHF Amended Complaint
and provided in paragraphs 8.e., 9.b., 11 and in the prayer at paragraph C . . . that Yu
could still be in violation of trade infringement depending on what had yet to be
determined. [¶] . . . Under the broad obligations encompassed in the duty to defend as
interpreted in California case law, this conditional language would trigger the duty to




                                               6
defend. The extrinsic evidence that adjuster Drain obtained from attorney Silberman[2]
does not negate this potential for coverage. . . . Within the wording of the HHF Amended
Complaint were clear allegations that Yu might still be in violation of HHF’s contractual
rights.” (Original italics.)
               Sequoia argues the trial court erred in finding a duty to defend because
HHF’s amended complaint did not contain a covered claim. Sequoia further argues the
mere possibility HHF might amend the complaint to reassert the trademark infringement
claim was not a sufficient basis for finding a duty to defend. According to HHF, it is
error to base a duty to defend on the mere “speculation” HHF might amend its complaint
to add a covered claim in the future. The argument lacks merit.
               This case was not a situation where the insurer had to speculate about a
future amendment of HHF’s complaint in the Kansas Lawsuit to find the potential for
coverage. To the contrary, the complaint Yu tendered to Sequoia plainly prayed for relief
for trademark law violations –– an indisputably covered claim –– in the event mediation
was unsuccessful and discovery revealed facts supporting that very claim. Under the
more liberal federal pleading standards applicable to the Kansas Lawsuit, no formal
amended complaint would have been necessary for HHF to pursue damages from Yu for
alleged trademark law violations. (Fed. Rules Civ. Proc., rule 15(b)(1), 28 U.S.C.
[at trial, “[t]he court should freely permit an amendment when doing so will aid in
presenting the merits and the objecting party fails to satisfy the court that the evidence
would prejudice that party’s action or defense on the merits”]; Fed. Rules Civ. Proc.,
rule 54(c), 28 U.S.C. [“Every . . . final judgment [other than a default judgment] should
grant the relief to which each party is entitled, even if the party has not demanded that
relief in its pleadings”].)

       2      Here, the trial court was referencing evidence Sequoia’s adjuster handling
Yu’s tender had learned from HHF’s counsel in the Kansas Lawsuit that HHF was not
pursuing the trademark infringement claim it had pleaded in the original complaint.


                                              7
              We find it particularly significant HHF plainly stated its intent, should
mediation fail, to conduct formal discovery on whether Yu had ceased using the
Candlewood Suites trademark. HHF’s explicit statement of its intent to conduct formal
discovery on that indisputably covered claim created a potential for coverage. Under the
Policy, Yu had a reasonable expectation of a defense to this trademark violation claim.
Sequoia’s refusal to provide Yu with an attorney to defend her deposition on that issue,
should mediation fail, flatly violated her reasonable expectation of coverage. (See
Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 869
[“An insurer has a duty to defend when the policy is ambiguous and the insured would
reasonably expect the insurer to defend him or her against the suit based on the nature
and kind of risk covered by the policy, or when the underlying suit potentially seeks
damages within the coverage of the policy”].)
              We further note Sequoia could not base its denial of tender on the fact
HHF’s counsel in the Kansas Lawsuit told Sequoia his client did not intend to seek
recovery for trademark violations. Such a statement by counsel was inherently
self-serving because it effectively deprived Yu of an insurance-paid defense in the
Kansas Lawsuit, thereby increasing pressure on Yu to settle. Such a self-serving,
nonbinding representation by opposing counsel is not a sufficient basis for denying tender
of the defense, particularly when contrasted with the allegations in the amended
complaint and HHF’s later acknowledgment in the settlement agreement that the Kansas
Lawsuit “alleged claims arising out of YU’s advertising and sought protection of
Candlewood Suites related to copyright, trademarks, trade names and slogans.”
              “If any facts stated or fairly inferable in the complaint, or otherwise known
or discovered by the insurer, suggest a claim potentially covered by the policy, the
insurer’s duty to defend arises and is not extinguished until the insurer negates all facts
suggesting potential coverage.” (Scottsdale Ins. Co. v. MV Transportation (2005)
36 Cal.4th 643, 655.) Guided by that principle, we conclude the trial court properly

                                              8
found the allegations in the amended complaint created a potential for coverage under the
Policy, and thus a duty to defend Yu in the Kansas Lawsuit.

C.     The Trial Court Erred in Applying the Intra-Insured Claims Exclusion to Deny
       Coverage
              Despite finding the Kansas Lawsuit created a potential for coverage under
the Policy, the trial court concluded Sequoia had no duty to defend Yu because HHF was
an “insured” under the Policy’s Intra-Insured Claims exclusion and that exclusion
therefore barred coverage. We disagree because HHF does not qualify as an insured
under the Policy for the Kansas Lawsuit.
              “[P]olicy exclusions are strictly construed.” (E.M.M.I., supra, 32 Cal.4th at
p. 471.) “‘“Any ambiguous terms are resolved in the insureds’ favor, consistent with the
insureds’ reasonable expectations.”’ [Citation.]” (Id. at pp. 470-471.) Nonetheless, a
policy exclusion is given “‘literal effect’” and applied to deny coverage that would
otherwise exist “‘where an exclusion is clear and unambiguous.” (Westoil Terminals Co.,
Inc. v. Industrial Indemnity Co. (2003) 110 Cal.App.4th 139, 146.)
              Here, the Policy’s Intra-Insured Claims exclusion states, “Liability
Coverage, as provided under this policy, does not apply to injury or damage sustained by
any insured that is described in Section II — Who is an Insured. We shall have no
obligation to defend or indemnify any insured against a claim by another insured. [¶] . . .
If a claim is made or a complaint is filed by an insured against an individual or entity
which is also an insured, then there is NO LIABILITY COVERAGE for that person or
entity, regardless of any other coverage provisions that might otherwise apply.”
(Boldface omitted.)
              On its face, the Intra-Insured Claims exclusion bars coverage if the Kansas
Lawsuit is a claim by an “insured” against another “insured” regardless of the form of the
claim or complaint. The parties do not dispute Yu is an insured because she is the named



                                             9
insured who purchased the Policy. The parties’ dispute focuses on whether HHF is an
insured within the meaning of this exclusion.3
              The Policy states, “The word ‘insured’ means any person or organization
qualifying as such under Section II – Who is an Insured.” The trial court found HHF was
an insured under the Policy based on two separate endorsements that amended “Section II
– Who is an Insured”: (1) the “Additional Insured – Designated Person or Organization”
endorsement (Additional Insured Endorsement), and (2) the “Commercial General
Liability Coverage Form Extender” endorsement (Coverage Extender Endorsement). We
therefore must determine whether HHF “qualify[ied]” as an insured under either of these
endorsements.

       1.     The Additional Insured Endorsement
              This endorsement provides, “Section II — Who is an Insured is amended to
include as an additional insured the person(s) or organization(s) shown in the Schedule,
but only with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal and
advertising injury’ caused, in whole or in part, by your acts or omissions or the acts or
omissions of those acting on your behalf: [¶] A. In the performance of your ongoing
operations; or [¶] B. In connection with your premises owned by or rented to you.”
(Italics added, boldface omitted.)


       3       Sequoia points to language in the Intra-Insured Claims exclusion that states,
“This exclusion shall apply regardless of the legal form any claim or complaint may take
and shall apply to each and every cause of action and allegation contained in a claim or
complaint if any cause of action in that claim or complaint in any manner sets forth an
allegation of any claim of injury or damage sustained by any insured.” Based on this
language, Sequoia contends the Kansas Lawsuit need only allege a single claim by an
insured against an insured for the Intra-Insured Claims exclusion to deny Yu coverage for
the entire Kansas Lawsuit. This language, however, is irrelevant because we conclude
the facts alleged in the Kansas Lawsuit did not give rise to even a single claim by an
insured against an insured within the meaning of the policy, and therefore the
Intra-Insured Claims exclusion did not apply.


                                             10
                To qualify as an insured under the Additional Insured Endorsement, HHF
therefore not only had to be designated as an additional insured, but it also had to face
liability for the identified types of injuries or damages that were caused by Yu’s acts or
omissions. (Gemini Ins. Co. v. Delos Ins. Co. (2012) 211 Cal.App.4th 719, 723
(Gemini); see National Union Fire Ins. Co. v. Nationwide Ins. Co. (1999) 69 Cal.App.4th
709, 719 [entity designated as additional insured does not qualify as insured under
insurance policy unless all conditions of additional insured endorsement are satisfied].)
                In Gemini, a tenant negligently started a fire that damaged a restaurant it
rented. The landlord’s insurer paid the landlord’s claim for the fire damage and then
sought reimbursement from the tenant’s insurer. The tenant’s insurer denied coverage
based on an intra-insured claims exclusion that barred coverage on claims by one insured
against another insured. The tenant’s insurer pointed out the landlord was an insured
under the exclusion based on an additional insured endorsement naming the landlord.
The landlord’s insurer then sued the tenant’s insurer and the trial court entered judgment
against the tenant’s insurer because the additional insured endorsement made the landlord
an insured only when the landlord faced liability resulting from the tenant’s act or
omission in operating the restaurant, and the underlying claim did not seek to hold the
landlord liable for the tenant’s act or omission. (Gemini, supra, 211 Cal.App.4th at
pp. 721-722.)
                The Court of Appeal affirmed because “[a]n additional insured provision is
designed ‘“to protect parties who are not named insureds from exposure to vicarious
liability for acts of the named insured,”’” and the landlord did not face vicarious liability
from a third party based on the tenant’s act or omission. (Gemini, supra,
211 Cal.App.4th at p. 723.) Instead, the landlord sought to recover for its own direct
damages caused by the tenant’s negligence. Consequently, the landlord did not qualify as
an insured under the additional insured endorsement and the intra-insured claims
exclusion did not bar the landlord’s claim. (Ibid.)

                                              11
               Here, the Additional Insured Endorsement also made HHF an insured only
when it faced vicarious liability based on Yu’s acts or omission, i.e., “only with respect to
liability for . . . ‘personal and advertising injury’ caused, in whole or in part, by [Yu’s]
acts or omissions . . . .” HHF, however, did not face liability from a third party in the
Kansas Lawsuit. To the contrary, HHF was the plaintiff who sought to impose liability
on Yu for her act or omission in the same way the landlord sought to impose liability on
the tenant in Gemini. Accordingly, HHF did not qualify as an insured based on the
Additional Insured Endorsement, and the trial court erred in concluding the Intra-Insured
Claims exclusion applied.

       2.      The Coverage Extender Endorsement
               This endorsement provides, “Section II — Who is an Insured is amended to
include as an additional insured, any person or organization in a class described below,
with whom you have agreed in writing in a contract or agreement that such person or
organization is to be added as an additional insured on your policy. The inclusion as an
additional insured is subject to the conditions shown in the descriptions of the applicable
Additional Insured class. . . . As respects all the foregoing, the contract or agreement
must: [¶] a. Have been executed and be in effect prior to the ‘bodily injury’, ‘property
damage’, or ‘personal injury and advertising injury’ to which this coverage applies; and
[¶] b. Be in effect at the time of the ‘bodily injury’ ‘property damage’, or ‘personal
injury and advertising injury’ to which this coverage applies, occurred. [¶] The
Additional Insured classes are: . . . [¶] . . . [¶] 10. Grantor of Franchise [¶] A person
or organization who grants a franchise to you, but only with respect to their liability as a
grantor of a franchise to you.” (Italics added; boldface omitted.) Sequoia and the trial
court relied on the franchise grantor class to conclude HHF was an insured under this
endorsement.




                                              12
              The Coverage Extender Endorsement expands the Policy’s definition of an
insured to provide coverage to 10 classes of persons or organizations that satisfy the
endorsement’s conditions regardless of whether those persons or organizations are
expressly designated as additional insureds. For HHF to qualify as an insured under the
franchise grantor class in the Coverage Extender Endorsement, HHF and the Kansas
Lawsuit must satisfy each of the following conditions: (1) HHF must have a written
contract with Yu requiring her to include HHF as an additional insured on her insurance
policy; (2) that contract must have been executed and in effect before the injury occurred
for which the Coverage Extender Endorsement provides coverage; (3) that contract also
must have been in effect at the time the injury occurred for which the endorsement
provides coverage; (4) HHF must have granted Yu a franchise; and (5) HHF must have
faced liability as a grantor of a franchise to Yu. HHF and the Kansas Lawsuit did not
satisfy the third and fifth conditions.
              On the third condition, the parties agree the contract requiring Yu to name
HHF as an additional insured was the Licensing Agreement and HHF terminated that
agreement on November 20, 2008. The Kansas Lawsuit’s allegations gave rise to two
potential types of damages: (1) damages for Yu’s breach of the Licensing Agreement by
failing to comply with HHF’s requirements regarding bed linens and safety reports, and
(2) damages for Yu’s unauthorized use of trademarks, service marks, and trade names.
The breach of contract damages necessarily occurred before HHF terminated the
Licensing Agreement because Yu’s alleged breach was the stated reason for HHF
terminating the agreement, but the trademark damages necessarily occurred after HHF
terminated the Licensing Agreement because Yu had the right to use the trademarks,
service marks, and trade names under the Licensing Agreement until HHF terminated it.
Consequently, the only damages or injury that possibly could have occurred while the
Licensing Agreement was in effect was the breach of contract damages. Those damages,
however, are not damages to which the Coverage Extender Endorsement applies because

                                            13
they are not damages for “‘bodily injury’, ‘property damage’, or ‘personal injury and
advertising injury’” as defined in the Policy. The third condition for HHF to qualify as
an insured under the Coverage Extender Endorsement therefore was not satisfied because
the contract that required Yu to name HHF as an additional insured was not in effect at
the time of any injury or damage to which that endorsement or the Policy applied.
              Sequoia contends HHF satisfied any timing requirement necessary for it to
qualify as an insured because the Kansas Lawsuit alleged conduct that predated HHF
terminating the Licensing Agreement. This arguments fails because Sequoia does not
distinguish between the breach of contract damages, for which neither the Coverage
Extender Endorsement nor the Policy in general provided coverage, and the trademark
damages, which could not have occurred until after HHF terminated the Licensing
Agreement. Indeed, Sequoia fails to recognize the Coverage Extender Endorsement
imposed a timing requirement for HHF to qualify as an insured under that endorsement.
Instead, to support its timing argument, Sequoia cites to the Policy’s general provisions
defining the scope of the coverage for personal and advertising injury liability. Sequoia’s
reliance on those provisions is misplaced because they are irrelevant to determining
whether HHF qualified as an insured under the Coverage Extender Endorsement. In
addition, the conduct Sequoia relies on occurred before HHF terminated the Licensing
Agreement and did not raise personal and advertising injury liability; it supports only a
breach of contract claim.
              HHF and the Kansas Lawsuit also did not satisfy the Coverage Extender
Endorsement’s fifth condition for HHF to qualify as an insured because HHF did not face
liability as a grantor of a franchise to Yu based on the Kansas Lawsuit. As explained
above, policy provisions that designate persons or organizations as additional insureds are
generally “designed ‘“to protect parties who are not named insureds from exposure to
vicarious liability for acts of the named insured.” [Citation.]’ [Citation.]” (Gemini,
supra, 211 Cal.App.4th at p. 723.) In designating franchisors as additional insureds

                                            14
protected by its coverage, the Coverage Extender Endorsement limits that coverage to
franchisors that face “liability as grantor of a franchise to [the named insured].” Here,
HHF faced no liability in the Kansas Lawsuit. Plainly, HHF was the plaintiff seeking to
impose liability on Yu and therefore did not qualify as an insured under the Coverage
Extender Endorsement. (See ibid.)
              Sequoia contends the $100,000 HHF paid Yu to settle the Kansas Lawsuit
demonstrates HHF faced liability in that lawsuit as the grantor of a franchise to Yu. But
nothing in the Kansas Lawsuit settlement agreement explains why HHF agreed to pay Yu
$100,000 to settle that lawsuit. Nor does the record include any pleading or other
document showing Yu or anyone else asserted any claim against HHF in the Kansas
Lawsuit. Moreover, Sequoia cannot establish the propriety of its decision to deny Yu’s
defense tender based on events that occurred after Sequoia denied the tender. (See
Wausau Underwriters Ins. Co. v. Unigard Security Ins. Co. (1998) 68 Cal.App.4th 1030,
1044 [“‘“[F]or an insurer, the existence of a duty to defend turns not upon the ultimate
adjudication of coverage under its policy of insurance, but upon those facts known by the
insurer at the inception of the third party lawsuit”’” (italics omitted)].) The settlement is
the only evidence Sequoia cites to show HHF faced liability in the Kansas Lawsuit, but
that settlement occurred well after Sequoia denied Yu’s tender and left her to defend that
lawsuit on her own.
              Accordingly, we conclude HHF did not qualify as an insured under the
Coverage Extender Endorsement, and the trial court erred in relying on that endorsement
to conclude the Intra-Insured Claims exclusion barred coverage. That conclusion
eliminates the need to address Yu’s contentions that the Intra-Insured Claims exclusion is
unenforceable because it is not conspicuous, plain, or clear, and violates public policy.




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                                        III
                                  DISPOSITION

          The judgment is reversed. Yu is entitled to her costs on appeal.



                                              ARONSON, J.

WE CONCUR:



MOORE, ACTING P. J.



THOMPSON, J.




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