Covenant Not to Execute

A claimant may sue an insured person or business for damages, and if the insurer disputes coverage or declines a settlement, the defendant faces a possible judgment beyond what it can pay. A claimant might offer not to collect from the defendant personally in exchange for a path to pursue insurance-related rights.

The phrase not to execute means not to enforce a judgment against the protected party under the covenant's terms, which is not always the same as releasing the underlying claim or declaring that no loss occurred, so wording and local law are critical. An agreement can pair the covenant with an assignment, under which the insured may transfer a claim that it believes it has against the insurer, such as a claim about an unreasonable refusal to settle.

Assignment is a distinct legal act and its validity must be assessed separately. A stipulated judgment is an amount agreed between parties rather than necessarily decided after trial, so if the insurer did not join that agreement, it may contest the amount and whether it is bound, and the claimant and insured cannot simply set any number and send an invoice to the insurer.

California's Supreme Court considered a case involving a stipulated judgment, an assignment and a covenant not to execute in Hamilton v Maryland Casualty, and refused to treat that negotiated judgment as proof of the insured's damages against a defending insurer under the facts before it. The same opinion discussed circumstances in which a pretrial assignment and covenant might protect the insured while the underlying case proceeds to a real judgment.

Its holding is not a universal rule for every state or every coverage dispute, so legal advice must be tied to the facts and forum. Insurers may fear collusion if a defendant who will never pay agrees to an inflated judgment, while claimants may argue that a covenant lets an insured avoid ruin after an insurer failed to settle reasonably.

Courts weigh these concerns under their own law. Timing affects rights, because a covenant before trial, a stipulated judgment after negotiations and a final judgment after litigation may create different legal positions, so the parties should record when the assignment becomes effective and what claims remain pending.

A covenant may protect only named assets, specified people or a particular judgment, and a manager should not assume that affiliates, directors or every future claim are included. Read the exact beneficiaries and scope.

Insurance policies can impose notice, cooperation and consent conditions, so entering a side settlement without considering those terms can create further disputes, and the insured should preserve communications and get jurisdiction-specific advice before committing. This is a legal settlement mechanism, not an insurance product.

The useful glossary takeaway is who promises not to collect from whom, what happens to the underlying claim, and why the insurer might dispute the result.