As U.S. insurance brokers prepare liability claims for their clients for losses suffered as a result of the Japanese nuclear crisis, the Japanese government is setting up an insurance fund to compensate victims.

The process is similar to that which came after a September 1999 radiation leak at Japan's Tokaimura nuclear fuel fabrication plant when the Japanese government established a Dispute Reconciliation Committee for Nuclear Damage Compensation to resolve claims disputes.

The government compensation fund will cap the liability of Tokyo Electric Power Co. Inc., the utility that owns the stricken Fukushima Daiichi Nuclear Power Plant.

Under a plan announced last week by Masataka Shimizu, president of TEPCO, the utility will make an initial payment of 50 million yen ($590,000) into a fund that will pay “temporary compensation” of 1 million yen ($11,800) to families and 750,000 yen ($8,850) to individuals. TEPCO estimates 50,000 households are eligible for the initial payments.

The fund will be further financed with loans from private banks, surcharges on other utilities that operate nuclear plants in Japan, and new shares of TEPCO preferred stock.

TEPCO has yet to determine the extent of the damage to its Fukushima Daiichi nuclear reactors, but analysts at JPMorgan Chase & Co. estimate it could cost at least 554 billion yen ($6.54 billion) to scrap the plant and switch power generation to thermal power plants that have been offline. In addition, JPMorgan predicts TEPCO could face more than 2 trillion yen ($23.6 billion) in liability claims, while Bank of America Merrill Lynch analysts project the bill could reach $130 billion if the crisis continues.

However, the Japanese government is expected to cap TEPCO's liability exposure from the accident to between 2 trillion yen and 3.8 trillion yen ($44.84 billion).

The Japan Act on Compensation for Nuclear Damage holds plant operators strictly liable for any nuclear accidents and requires plant operators to carry 120 billion yen ($1.42 billion) in liability insurance per facility.

But the insurance, provided by the Japanese Atomic Energy Insurance Pool, excludes coverage for a “grave natural disaster,” such as earthquakes or tsunamis. As a result, the Japanese government is expected to step in to pay the majority of liability claims filed against TEPCO.

Because it is effectively uninsured for its losses, TEPCO has secured a $24 billion bank loan and is selling off real estate to cover repairs at the damaged power stations and cover compensation and liability costs.

The nuclear catastrophe comes on the heels of two consecutive losing years for TEPCO, according to analysts at JPMorgan Chase. In addition, before the crisis, TEPCO reportedly had $91 billion of debt on its books. The company, Japan's largest utility supplying roughly one-third of the nation's electricity, is valued at $35 billion.

Daniel McGarvey, chairman of Marsh Inc.'s U.S. Power and Utility Practice based in Greenville, S.C., said he expects the claims resolution process will be similar to that which came after the 1999 Tokaimura accident, which settled 6,885 claims with a total compensation amount of 12.68 billion yen ($149.6 million).

After that incident, individuals, businesses, farmers, fishermen and industrial organizations all filed claims against JCO, a wholly owned subsidiary of Sumitomo Metal Mining Co. of Tokyo, seeking payment for bodily injury, business interruption and lost income, loss of real estate value, evacuation expenses and mental suffering, according to a 2000 report by Japan's Science and Technology Agency.

In addition, three injured workers received 120 million yen ($1.4 million) in compensation under Japan's Workers Compensation Accident Compensation Insurance System.

“We are going to be making claims on behalf of Marsh clients,” Mr. McGarvey said.

While not divulging the names of clients or the extent of losses, Mr. McGarvey provided some potential scenarios that could give rise to liability claims.

An example is “if you're a U.S. automobile transmission manufacturer and you're scrambling to find new parts suppliers,” because of a supply chain interruption caused by the earthquake and tsunami, he said. Or “if the loss was caused by evacuation, contamination, or the inability to transit through the area, you may have a claim,” he added.