What you are or you aren't covered for should be set out in the terms of the contract. But with regard to the "illegal act" question, it must be demonstrated that the illegal act (if one occurred) actually caused or contributed to the loss. If an illegal act occurred but did not contribute to the loss then the insurance company cannot deny the claim.
A non aviation example that crops up occasionally - an insurer cannot refuse a claim because someone was drunk at the wheel if the fact that they were drunk and in control of a car did not actually contribute to the loss. If a drunk driver is sitting at a red light and someone slams into the rear of them, then their insurance policy does actually provide cover.