Four Types of Insurance Businesses Need

BOSTON ( TheStreet) -- In starting and growing a business, an entrepreneur must strike a balance between cutting costs and covering the company's butt.

While some insurance policies are clearly unnecessary -- a software developer doesn't need crop insurance, for example -- others are more important than business owners might realize. Here are four policies that small-business owners ought to consider, regardless of industry.

Workers compensation insurance

Unlike general liability insurance, which is concerned with the possibility of injured clients, workers compensation insurance pays for medical and disability expenses for employees who are injured on the job, generally on a no-fault basis.

Anyone waffling on the decision to invest in workers comp should know that it's legally required for businesses in every state except Texas.

Requirements vary by state, but, in general, "if you have an employee, you are probably required to have workers compensation insurance," says Douglas Dirks, chief executive officer of Employers Holdings ( EIG), which specializes in workers comp insurance for small businesses. (Exceptions often include housecleaners and unpaid volunteers.) Small businesses should avoid hiring other businesses unless a valid certificate proving workers compensation insurance can be shown, Dirks says.

Small businesses have a leg up on big businesses when it comes to the likelihood of fraudulent claims: Because a small-business owner is more likely to be within sight of any given employee, it's harder for a small-business worker to fake an injury.

Home business insurance

More than half of the firms in the U.S. are home-based, according to the Small Business Administration. Entrepreneurs who work from home may assume, wrongly, that their home businesses are covered by their homeowners insurance policy. But homeowners policies don't include business equipment such as computers and key documents. Worse, homeowners can run into trouble filing claims for personal property if they neglect to tell their insurance company that they're also using the home for business purposes.

To be safe, it makes sense to invest in home business insurance, which covers business property, lost documents and loss of income due to lost accounts receivables or emergency relocation. Sometimes this means upgrading a homeowners policy to include the home business, too.

Key person insurance

Especially in small businesses, the death of an important employee can mean the death of the company if there's no succession plan. Key person insurance is a life insurance policy in which the company is the beneficiary, so if the key person dies or is incapacitated for a long time, the company receives enough coverage to keep it afloat during the transition, whether that means finding and training a replacement or paying off investors before turning the company over to new owners.

Product liability insurance

Anyone who doesn't understand the importance of product liability insurance need only watch the movie "The Jerk" -- a riches-to-rags story in which an entrepreneur loses all his money after his invention, a nose grip for eyeglasses, causes thousands of customers to go cross-eyed.

To that end, it's a good idea for any entrepreneurial manufacturer to pursue product liability insurance, which covers consumer claims related to a company's faulty product. This can be easier said than done for new businesses, as an insurance company might not want to insure a product without previous proof of its relative efficacy and safety on the market. And premiums on risky products (airplane parts or automobile brakes, for example) may be beyond the means of a startup. But simply assuming that your product is safe could be catastrophic. Just ask Toyota ( TM).

-- Reported by Carmen Nobel in Boston.

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