The utility company will pay the money to Walton Angling Club after a ruptured pipe leaked large quantities of raw sewage into Walton Colliery Lake, killing the fish and all other aquatic life.
Fish Legal, the environmental law group who represented Walton Angling Club, said that fish stocks at the lake had been "effectively wiped out" following the incident in October 2013.
Attempts have been made to restock the lake, but these have been largely unsuccessful, leaving the club unable to fish their most popular lake.
Les Gray, Secretary of Walton Angling Club, said: “It has been a long saga to get some kind of justice for the club for the five-year loss of one of our best waters.
"This was complicated by the unsuccessful restocking attempt by Yorkshire Water before the lake had sufficiently recovered from the 2013 sewage spill.
“However, we are very grateful for the dogged determination of Fish Legal and our expert BFJ to set the record straight and obtain substantial compensation towards the club’s losses.”
In 2016, Yorkshire Water were fined £600,000 at Leeds Crown Court after being prosecuted by the Environment Agency.
Opened in the 1980s, Walton Colliery was constructed from reclaimed coal mine land in Walton, Wakefield. Many of the Walton Angling Club's members are former miners.
Andrew Kelton, Solicitor for Fish Legal, commented: “This case was unusual. Although liability was straightforward as Yorkshire Water had pleaded guilty in the criminal court, actually obtaining an adequate level of compensation was complicated by the 2016 re-stocking which we effectively needed to prove had been unsuccessful.
"Nevertheless, we are happy that the club’s long wait for resolution of this issue has ultimately been worthwhile."
A spokesperson for Yorkshire Water said: "Protecting the environment is a priority for us which is why we are deeply sorry about the incident at Shay Lane in Walton in October 2013.
"Following the incident we invested over £1m to replace the pipe which burst and caused the incident to occur.”