His contract, which is only valid for the Bundesliga and not the second tier, will run through to June 2017.
Robert Kovac, his brother, will join the Eagles as assistant coach.
A return to Germany
Both Kovac brothers have enjoyed successful spells in Germany as players, and will be keen to replicate that on the managerial stage.
Niko was at both Leverkusen and Bayern during Robert's stints, though the former spent most of his time in the capital and made over 200 appearances for Hertha BSC.
Limited managerial experience
44-year-old Niko has yet to venture into club management, having been an assistant coach at Red Bull Salzburg before moving onto the Croatia under-21.
He won his first four games in charge with the youth team and was promptly given control of the senior squad in October 2013.
Kovac successfully guided Croatia to the 2014 World Cup in Brazil with a play-off win over Iceland, but failed to repeat the feat for the 2016 European Championships.
Bruchhagen and Kovac have their say
"It has to be Niko Kovac's aim to get the best out of the side to secure safety," explained chairman Heribert Bruchhagen. "We're convinced that he will be able to achieve this."
Kovac explained, "We're going to have one-on-one meetings with the players. We need to get some positivity back in our mindset."
The Croatian coach added, "As a head coach, I'm expecting the team to be disciplined and passionate."
Kovac's first game in charge will be against Borussia Mönchengladbach on Saturday afternoon at Borussia-Park, with the Eagles currently three points above the drop zone.