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covenant not to sue

An agreement by an injured party not to sue the party that caused the injury. It is distinguishable from a release of liability. A release is a waiver or relinquishment of a known right. A release of liability will relinquish, or destroy, the injured party's cause of action. A covenant not to sue, on the other hand, is not a waiver of a known right; nothing is relinquished or destroyed. A covenant not to sue, therefore, preserves the existence of the cause of action but places contractual restrictions on the injured party's right to file suit. An injured party cannot assign a cause of action after it has been released. However, an injured party can assign a cause of action that is merely subject to the injured party's covenant not to sue, after which the assignee may be free to file suit. Under the law of some states, a policyholder that releases a tortfeasor from liability may be held to have prejudiced the insurer's right of subrogation. Where a policyholder merely enters a covenant not to sue, under which the policyholder's cause of action against the tortfeasor still exists and can be assigned to an insurer that may be free to file suit on its own, the policyholder may be held to have preserved the insurer's right of subrogation.

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