The checkbox to use sequentially enables dnsmasq's –strict-order. Their man page describes that as:
By default, dnsmasq will send queries to any of the upstream servers it knows about and tries to favour servers that are known to be up. Setting this flag forces dnsmasq to try each query with each server strictly in the order they appear in /etc/resolv.conf
http://www.thekelleys.org.uk/dnsmasq/docs/dnsmasq-man.html
The order in resolv.conf should match what you have configured under System>General Setup, at least assuming you also have no dynamic WANs or have disabled DNS server updates from DHCP/PPP.
If resolv.conf has the order as desired, then I suspect either your internal DNS servers aren't responding for some things, or maybe dnsmasq's –strict-order doesn't do what you're expecting and stopping at the first server that replies (I would think it does, but not entirely sure off the top of my head).
Getting a packet capture of all UDP 53 traffic on LAN and seeing what that looks like might be telling. Maybe your internal servers are failing to respond at times.