The payment to the family of the man, known as Mr Ward because Aboriginal culture prohibits using the given name of a dead person, was announced by Western Australian Attorney General Christian Porter.
Mr Ward died in temperatures of up to 50 degrees Celsius as he was driven across Western Australia to face a drink-driving charge in a van with broken air-conditioning.
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Porter said there were no conditions attached to the payment to Ward's widow Nancy and four children, who remained free to pursue legal action against the state government or private security contractor G4S.
"It's meant to show contrition, deep, deep remorse for what has occurred," he said.
Ward's death in January 2008 caused outrage among the Aboriginal community, which was further angered last month when the director of public prosecutions announced no charges would be laid over the incident.
