The settlement, if approved, will mark an end to more than two years of legal troubles for Mortenson after "60 Minutes" and author Jon Krakauer published reports that alleged Mortenson fabricated parts of his best-selling books and mismanaged the Central Asia Institute.
After those reports, then-Montana Attorney General Steve Bullock launched an investigation into the charity. A settlement required Mortenson to repay $1 million and made fundamental changes to the institute's structure.
Four readers then filed a lawsuit that claimed Mortenson, co-author David Oliver Relin, publisher Penguin and the Central Asia Institute were involved in a fraud conspiracy by Mortenson lying in his best-selling "Three Cups of Tea" to boost sales and donations to the charity.
"Three Cups of Tea" and the sequel, "Stones Into Schools," recount how Mortenson started building schools in Pakistan and Afghanistan. "Three Cups of Tea" has sold about 4 million copies since being published in 2006.
A district judge threw out the lawsuit, and the 9th U.S. Circuit Court of Appeals upheld the ruling.
Along the way, Mortenson and the Central Asia Institute racked up approximately $1.8 million in legal fees defending themselves in the investigation and the lawsuit.
The charity sued Philadelphia Indemnity Insurance Co., saying the insurer was obligated to pay for all of its defense costs, but offered to reimburse the institute 35 percent and Mortenson 25 percent of their defense fees in the lawsuit.
The insurer offered to reimburse 20 percent of Mortenson's costs and all of the Central Asia Institute's costs for the state investigation, according to the complaint.
The insurance company said in court filings that certain allegations against Mortenson don't fall within the policy, including the publication of material that the insured person or company knows is false.
The $1.2 million settlement was hammered out in a private mediation conference held Wednesday before U.S. Magistrate Judge Jeremiah Lynch in Missoula, said attorney John Morrison of Helena and Billings attorney Carey Matovich.
Matovich represented the Central Asia Institute, and Morrison represented a law firm that defended Mortenson in the investigation and in the lawsuit.
The settlement still must be approved by U.S. District Judge Dana Christensen. The judge has given the sides until Dec. 6 to file dismissal papers.
Philadelphia attorney Erin Yoshino referred questions to another attorney, Brian Harrison, who did not return a call for comment.
Mortenson declined to comment.