An $18 million settlement to partially cover losses in prepaid funeral plans has been distributed to Illinois funeral directors after being tied up in a lawsuit for nearly two years.

The state Department of Insurance announced the distribution Friday, but its news release did not mention that the settlement terms had been changed.

The original settlement in May 2009 called for Merrill Lynch & Co. to pay $18 million to resolve allegations that it did not properly supervise one of its insurance agents who was a financial adviser to the Springfield-based Illinois Funeral Directors Association. The trade group managed a trust that was supposed to safeguard consumers who bought prepaid funeral plans.

But a state audit in 2005 revealed that the trust was underfunded by as much as $50 million and found other irregularities, such as excessive management fees.

The deficit meant that funeral directors could lose money on the prepaid plans, and consumers who bought non-guaranteed contracts also could suffer harm. Some consumers and funeral homes sued  Merrill Lynch and its financial advisers.

To receive the proceeds, funeral directors had to release Merrill Lynch from any legal claims. Some objected  and sued the insurance department and comptroller’s office, which regulates prepaid funeral contracts.

A year ago, a Cook County judge ruled that the department of insurance acted beyond the scope of its statutory authority to condition the distribution of the settlement funds on a broad release. The insurance department amended the settlement to exclude the release.

The judged entered her final order in November.

“The distribution of the $18 million will help funeral directors honor commitments made to Illinois families and will further support the essential services provided by funeral homes around the state,” Insurance Director Michael McRaith said in a statement.

At least two suits are pending against Merrill Lynch.

asachdev@tribune.com