John Gill was exposed to the lethal gas over a number of years while at Royal Manor school, a secondary in Portland, Dorset.
The local authority denies liability but its insurer has made an out-of-court settlement of more than pound;562,000 to Mr Gill, 52, who has since given up work through ill health.
The council now admits it made smaller payments to two other staff who were "slightly affected".
Nigel de Gruchy, general secretary of the National Association of Schoolmasters Union of Women Teachers, said: "This settlement is very high because Mr Gill will never be able to work again. He has suffered severe mental impairment and requires permanent supervision."
Mr Gill said: "I only just made it this far and would not have done so without the support of the NASUWT and the union's solicitors. My life was destroyed."
He joined the school in 1978, becoming head of science in January 1994. He always taught in the same science laboratoy, above the school boiler room, with the exception of a year's secondment.
The union says he was exposed to the gas because a service duct, which entered the laboratory under the teacher's workbench, leaked.
Mr Gill suffered headaches and lethargy but the symptoms subsided during the weekends and holidays.
Illness kept him off work for the spring term of 1992 and, after returning, his performance deteriorated. The school accused him of incompetence, although this allegation was later dropped.
He continued suffering ill health during the winters of 1992 and 1993.
On January 1994 he went into the laboratory after it had been closed and left unventilated through the Christmas holiday and was overcome by the fumes.
Later that day, he was driven home by a colleague, feeling unwell, and never returned to work.
An local authority spokesman said: "We have tightened up our boilerburner contract arrangements. All boilers are inspected twice a year. Every time a boiler is installed or maintained we now install a carbon monoxide sensor."