California Insurance Commissioner Dave Jones announced the settlement late Friday.
At issue was a controversial 2009 initiative by Jones' predecessor, Steve Poizner, that threatened to penalize insurance companies and publicize their investments in companies that indirectly benefit the government of Iran.
The U.S. State Department has labeled Iran a government sponsor of terrorism.
Insurance companies successfully challenged Poizner, saying his anti-Iran initiative was an illegal, so-called underground regulation. Poizner, in turn, sued a state agency, the Office of Administrative Law.
Jones praised the settlement for allowing him to keep and publicly release a list of California-licensed insurance companies that hold stock in foreign-owned corporations that do business with Iran.
"The resolution of this litigation is an important step forward for our efforts to make sure that the public, insurers and investors are aware of companies doing business in the nuclear, military and energy sectors of Iran's economy, particularly in light of the growing nuclear threat posed by Iran," Jones said.
The settlement also allows the Department of Insurance to share its information with the federal government, which has been tightening its own economic sanctions against Iran.
Since its inception, the Iran divestment initiative has caused more than 1,000 insurance companies to refrain from investing in Iran, said department spokesman Byron Tucker.
Five insurance trade groups in a joint statement said they were pleased that the dispute had been settled. They stressed the legality of their investments in companies that do business with Iran.