Islander Jock
Speaking as a lawyer, it all depends on the terms of the contract of insurance between the owner of the aircraft and the insurer.
I haven't ever had a chance to read an insurance policy for an aircraft, however, my gut reaction based on the behaviour of insurance companies that I have seen over the years is that they would grab any illegality with both hands as a reason to exclude any liability for the damage on the basis that the aircraft was not operated in accordance with the Act, regs etc.
This is certainly the approach they take with motor vehicle accident damage where the driver has a blood-alcohol reading in excess of the permitted maximum.
They would also try to argue non-liability, even if the illegal activity did not cause the damage.
The grey areas may creep in where there is no clear evidence that any illegal activity has taken place, only a suspicion. You may find in those circumstances that the insurance company would have to pay, but possibly not until legal nastyness had been instituted in a court.
I suspect that an insurance agent would be able to give you a clearer answer.
