UPDATE 1-Norfolk Southern to set up home value reimbursement fund after Ohio derailment

(Adds more from CEO letter in paragraph 6, timing of bill before Senate committee in paragraph 4, Ohio AG quote in paragraph 8)

By David Shepardson

WASHINGTON, May 9 (Reuters) - Norfolk Southern said on Tuesday it will establish a fund to reimburse homeowners who live near the site of a Feb. 3 train derailment in East Palestine, Ohio who sell their homes for less than what the property was worth before the incident.

Norfolk Southern CEO Alan Shaw told senators in a letter the railroad initially expects "eligible homeowners for this compensation to include those with homes within an approximately 5-mile radius of the derailment, and who sell their homes for less than their property’s pre-February 3 appraised value."

The Norfolk-operated train derailment of 38 cars including 11 carrying hazardous materials in the village caused cars carrying toxic vinyl chloride and other dangerous chemicals to spill and catch fire.

The announcement comes a day before the Senate Commerce Committee is set to debate sweeping bipartisan rail safety legislation proposed in the wake of the East Palestine disaster that would among other reforms increase maximum civil penalties from $100,000 to $10 million for rail safety violations, and requires two crewmembers to operate a train.

Transportation Secretary Pete Buttigieg said Tuesday the Senate proposal has "a lot of things that would really make a difference" -- including the tougher fines.

Shaw said in March the railroad supports addressing long-term health risks through the creation of a medical compensation fund and has agreed to work with the community on programs to protect drinking water over the long term.

In April, Norfolk Southern announced total accrued charges for the derailment of nearly $400 million - a figure that Shaw noted on Tuesday "does not include expected costs for funds relating to property value diminution, long-term healthcare, or water treatment."

In March, the state of Ohio and the U.S. Justice Department sued Norfolk Southern seeking to ensure that the railroad pays the full cost of cleanup and any long-term effects of the derailment.

"This lawsuit is designed to make sure that Norfolk Southern keeps their word to the people of East Palestine," Ohio Attorney General Dave Yost said. (Reporting by David Shepardson Editing by Chris Reese and Bill Berkrot)