Northwestern Mutual said the plaintiffs were "seeking more than their fair share of dividends."

Northwestern Mutual Life Insurance Co. has agreed to pay $84 million to settle a class-action lawsuit triggered by a change it made in 1985 in how it calculated dividends for a fixed-income annuity. 

The plaintiffs in LaPlant vs. Northwestern Mutual claimed the decision to pay dividends based on the yields from short-term bonds, instead of a dividend based on the overall performance of the mutual company, resulted in the loss of millions of dollars annually to investors. 

That change violated the terms of the annuity contracts, alleged the plaintiffs. 

“This lawsuit was a case of a small group of customers seeking more than their fair share of dividends, which would have come at the expense of all our other policy owners,” Northwestern Mutual spokeswoman Betsy Hoylman told CNBC. “At this point, it is best for our policy owners to close this matter.”

The “Pre-MN” annuity was sold to about 36,000 investors, 3,000 of whom resided in Wisconsin, where Northwestern Mutual is based, according to court documents. 

In 2011, a district judge issued a declaratory judgment against Northwestern Mutual, finding that the insurer violated the annuity contracts, breached its fiduciary duties, and was responsible for substantial “compensatory and punitive damages,” according to court documents. 

With that victory, the plaintiffs amended their complaint, seeking damages for annuitants in every state.

Northwestern Mutual moved to have the case heard in federal court. The insurer won a favorable ruling in U.S. District Court, which would have prevented a nationwide class. 

But in November 2012 the Court of Appeals for the 7th Circuit overturned that ruling, concluding a nationwide class was acceptable, and directed the case back to federal district court to be heard on its merits. 

Under the terms of the settlement, about 4,000 current and 29,000 former owners of the annuity will be able to share the award. The deal must be approved by a judge in U.S. District Court for the Eastern District of Wisconsin.

— Check out 6 Tax Questions on Deferred Annuities You Need Answered, Pt. 1 on ThinkAdvisor.