I don't think that the settlement from a lawsuit itself is tax free, but if worded correctly the party being sued could be responsible for the taxes. I was just looking at the bio of an actress the other day (I can't remember who now) that when she divorced her husband her settlement was tax free. Which I suspect means that her ex is the one who paid the taxes on her settlement.

So in that regards, yes it can be tax free. But once you put it into the bank and it starts collecting interest that interest is taxable.