In most parts of the world, driving without some form of vehicle insurance is an offence and can result in fines or other punishments. Having proper, up-to-date vehicle insurance is of vital importance in most civilized nations of the world because of the potential financial consequences after an accident. In order to understand vehicle insurance, it is important to understand what an insurance policy is and how it relates to the law.

An insurance policy is, essentially, a binding contract that works between an insurance company and the policy holder. In car insurance terms, the person who buys the policy can also be called the "insured". The insured then pays a sum of money, called a "premium", which ensures that the insurance company agrees to pay for certain types of loss or damages as specified in the contract.

An insurance policy is a contract of utmost good faith. What this means is that you, as a prospective policy holder, must answer all questions fully and honestly. Failure to do this means that insurance company are unable to assess the correct premium and, if you make a claim, may well render the contract null and void. You will then personally be liable to any damages.

In addition if your driving patterns change and, for example, you start to use your vehicle for business use, or you re-tune your vehicle by changing the engine management chip, or you modify the vehicle in any way, you are obliged to inform your insurers. Failure to do so may invalidate your cover.

Most governments regulate and monitor the many agencies and insurance sales companies that are working in vehicle insurance industry. In the US it is the state governments that manage this element as there is no federal level agency for motor insurance. Local state departments watch over the insurance industry closely and monitor the rates and the legal responsibilities of working within the insurance business. These departments are most commonly under the umbrella of the Department of Insurance.

In some other countries, insurance companies work with a Department of Motor Vehicle or other similar departments which establishes the legalities of the vehicle insurance policies and claims. These departments work in broadly the same way as the Department of Insurance in that the departments simply serve as watchdog ensure that the companies are fit and solvent and they can pay all potential liabilities. Without any legal oversight in the vehicle insurance policy, there is nothing preventing unfair practices or illegal activities from taking place in the industry.

Many consumers mistakenly sign up for cheap motor insurance in an effort to save money, but the savings often disappear when accidents happen. Elements of the law are in place to ensure that victims of accidents are rightfully compensated however, there are often limits to the liability of a insurance company under the policy and the negligent driver may, in fact, be required to meet the cost the remainder of the claim. In that case, having cheap vehicle insurance that may have appeared to save money in the first place may end up costing an considerably more in the long run.

It is very important to ensure that you are following the law of your particular country or state when you purchase a vehicle insurance policy. You need to make sure that your policy covers all of the potential risks and that it has enough liability within its structure to cover all of the incident damages that can occur.

Given the level of damages now being awarded without ample coverage you may find yourself personally liable. You need to make sure, therefore, that all of the legal aspects are met when you purchase your vehicle insurance policy.