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.