Certain types of insurance coverage are required by law while others are at the discretion of the business owner. Yet even some of the insurances that aren't legally required may be a necessity for other reasons. How do you sort it all out?

At the end of the day, there are three categories of insurance in a small business: (1) Insurance that is legally required, (2) Insurance that isn't but required, but is recommended, and (3) Insurance that is optional.

Legally Required Insurance

There are generally two types of insurance that are legally required in most states. Worker's compensation insurance covers lost wages and medical expenses for employees that suffer work-related injuries or illnesses. Unemployment insurance helps ease the transition for employees who are in between jobs. Both of these are required, but details may vary slightly from state to state. Check with the appropriate state agency to learn the requirements for your business. if your business has a mortgage or owns vehicles, you will also be required to maintain property insurance and vehicle insurance.

Recommended Insurance

Liability insurance tops the list of recommended insurance for most small businesses. This type of insurance comes in a variety of forms including general liability insurance, product liability insurance , and even content liability insurance . Its purpose is to insulate your business from legal damages in the event of a lawsuit. Your liability policy can be further strengthened by acquiring an umbrella policy that supplements your primary liability policy. In today's litigious society, you would be foolhardy to neglect liability coverage, even if it is not required in your state jurisdiction.

Most of the other forms of recommended insurances relate to maintaining an uninterrupted flow of operations. Officer and director insurance protects the company's decision-makers from lawsuits, while key man insurance protects the company from the loss of an integral employee. Business interruption insurance, on the other hand, insures against work stoppages that may occur as a result of fires or natural disasters, and may be available as a supplement to your liability insurance policy.

Optional Insurance

Business owners are not legally required to provide any form of insurance to their employees. These forms of insurance are completely optional, but are commonly used to beef up the company's fringe benefits package. Health insurance, dental insurance, life insurance, and vision insurance are all examples of insurances worth considering.

Home-based Business Insurance

Home-based businesses add an interesting wrinkle to the business insurance fracas. Since the business is located in your home, your homeowner policy may cover certain aspects of your business. But it would be a mistake to simply assume that your business will be covered by your residential policy just because it is based in your house. Do your research and contact a qualified insurance professional to help you assess potential coverage gaps.