Covenant Not To Execute Explained: Key Insights and 2025 Legal Perspectives

Julia Kagan is a financial and consumer journalist, formerly a senior editor for personal finance at Investopedia.

What Is a Covenant Not To Execute?

A covenant not to execute is a legal agreement in which the plaintiff consents not to enforce a judgment against the defendant. This agreement is commonly used in insurance claim lawsuits where the plaintiff aims to recover a portion of the damages from the insured party, while reserving the right to pursue additional claims against other insurance policies until full compensation is achieved.

How Does a Covenant Not To Execute Work?

Essentially, the covenant represents the plaintiff's commitment to refrain from collecting further damages directly from the insured. In insurance disputes, three key parties are involved: the insured, the insurer, and the claimant. Each has distinct objectives—the insured seeks to minimize payout, the insurer aims to limit its financial exposure, and the claimant pursues maximum compensation.

The insurer is responsible for defending the insured against claims. However, if the insurer refuses to settle or act in the insured’s best interest, the insured and claimant might agree to restrict the judgment amount, enabling the claimant to seek damages from the insurer instead.

Key Takeaways

• A covenant not to execute is a strategic promise by the plaintiff to limit damages sought from the insured in insurance lawsuits.
• It allows claimants and insured parties to focus on pursuing compensation from insurance carriers.
• Some states impose strict limitations or outright prohibit filings of such covenants.

Challenges and Legal Considerations

Many insurers contend that defendants protected by a covenant not to execute have no legal obligation to pay plaintiffs and thus have not incurred a loss. Some courts have invalidated these agreements, reasoning that a judgment confession without actual payment negates coverage and may encourage collusion between parties.

The legal treatment of covenants not to execute varies by jurisdiction. For example, courts in California follow a majority approach allowing such covenants under certain conditions, whereas North Carolina courts take a minority stance, viewing them as releases that absolve both insureds and insurers from obligations.

California requires insurers to deny coverage and defense before a covenant not to execute can be valid. Additionally, settlement agreements must be reasonable, non-collusive, and made in good faith.

Practical Example in 2024

Imagine a construction firm insured against liabilities during a hospital build. Years later, defects emerge, and the hospital operator files a claim for repairs. If the insurer refuses the settlement demand, the plaintiff might agree not to execute a judgment against the construction company, provided the company assigns its claim against the insurer to the plaintiff. This allows the plaintiff to pursue damages directly from the insurer, streamlining recovery while protecting the insured.

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