Williams' father George, daughter Dhakota and former wife Roberta claimed authorities failed in their duty of care because they should have been aware of the risk Johnson posed and properly monitored the unit.
The two parties have reached an out-of-court settlement, a week before the matter was due before the court.
She's still a minor and it's not appropriate to engage in commentary that would cause further distress to her.Martin Pakula, Victorian Attorney-General
George and Roberta Williams have withdrawn their claim for damages, but the Government has reached a settlement with teenager Dhakota, who was nine years old when her father was killed.
Attorney-General Martin Pakula issued a statement on Tuesday evening saying the terms of the settlement were confidential and subject to Supreme Court approval.
"The Victorian Government will not pay any compensation to George or Roberta Williams," he said.
"The Government denies any liability regarding Mr Williams' death in 2010 and the terms of settlement reflect this."
Mr Pakula did not say how much money Dhakota Williams would receive.
"Any funds paid to a minor are held in a court trust fund, supervised by the senior master of the Supreme Court, until the minor turns 18," he said in the statement.
Shadow attorney-general John Pesutto said the Premier must ensure that "not a single cent" of the compensation is able to be used, directly or indirectly, for the personal benefit of any adult member of the Williams family.
"The Victorian public is owed a full and honest explanation from Daniel Andrews on why he's agreed to pay out this compensation when he is saying the state of Victoria has no liability to do so," he said.
Mr Pakula said the Government had a responsibility to avoid "unnecessary and expensive litigation wherever possible".
"It needs to be remembered that Dhakota Williams, at the time of her father's death was nine years old," he said.
"She's still a minor and it's not appropriate to engage in commentary that would cause further distress to her.
"She was and remains an innocent person in this matter."
The family claimed Williams' killer had a history of attacking other inmates, including with parts of an exercise bike, and the state should have known of his heavy involvement with the notorious Prisoners of War jailhouse gang.
They also claimed they had lost financial benefits they expected in return for Williams' cooperating with police.
abc.net.au 15 July 2015
The Victorian government SHOULD be sued to the eyeballs.
As stated on national television, by the current Speaker of the House, Bronwyn Bishop:
"The first job of a government is to look after the safety of its people".
Since the government failed to "look after the safety" of Carl Williams, it is an OBLIGATION of the Williams family to sue.