You are right that it is unethical for the owner's vet to do the vetting for the vendor, but it is not illegal. I have bought horses before and the previous owner used the same vet as me, a vet we both trust 100% and he was quite happy to do the 5 stage vetting for me and my insurance. One horse passed lol one didn't. But that is an untypical scenario, usually I would never recommend it as the vet is caught in the middle and the vendor needs a fresh and independent recommendation.

There is'nt anything wrong with the vet doing a check on the horse after treating it though, but this is really locking the stable door after the horse has bolted lol. The horse is ill and has bad feet. Why do the insurance want a vetting? Usually only because of the value of the horse or a past history or a disclosure of a material condition or fact.