The City Council unanimously approved the damages on Friday to settle a wrongful death lawsuit filed last July.
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The family of George Floyd, the black man whose death at the hands of police officers sparked historic racial justice protests across America, has reached a $27 million (£19m) settlement with the City of Minnesota.
The settlement is the largest pre-trial settlement in a civil rights wrongful death case in US history, the Floyd family’s lawyers said in a statement.
Derek Chauvin, the Minneapolis police officer who was filmed kneeling on Floyd’s neck for nearly nine minutes until he passed out, is currently on trial facing murder and manslaughter charges in connection with his May 25 death. Three other officers also face charges.
The City Council unanimously approved the damages on Friday to settle a wrongful death lawsuit filed last July. The family alleged that police used excessive force against Floyd in violation of his constitutional rights.
Bridgett Floyd (R), sister of George Floyd, speaks to the media outside the Hennepin County Government Center where jury selection is taking place in the trial of former officer Derek Chauvin
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As part of the settlement agreement, $500,000 is to be used "for the benefit of the community" on the street where Floyd died, which has now become widely known as George Floyd Square.
"No amount of money can ever address the intense pain or trauma caused by his death to George Floyd’s family or to the people of our city," Lisa Bender, City Council president, said after the vote. "Minneapolis has been fundamentally changed by this time of racial reckoning."
Lawyer Ben Crump said it "sends a powerful message that black lives do matter and police brutality against people of colour must end."
"The city needs to exhibit responsible leadership in the face of the horrific tragedy that really was a watershed moment for America," Mr Crump said.
The death of 46-year-old Floyd, along with a spring of other police killings of black people that followed, ignited demonstrations against police brutality in states across the country.
Answering protesters’ demands, a number of cities have partially defunded their police forces and passed reforms to address inequality.
Floyd’s brother, Rodney Floyd, said the agreement was a "necessary step" for the family to get some closure.
"George’s legacy for those who loved him will always be his spirit of optimism that things can get better, and we hope this agreement does just that – that it makes things a little better in Minneapolis and holds up a light for communities around the country,” Mr Floyd said in a statement.
It is unusual for city officials to settle civil cases before criminal ones have been heard, and some legal experts said the agreement could be damaging to Chavin’s defence.
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