Insert from URL Options/Hotlinking?

I am concerned about having the option to "Insert from URL" option available to site admins on my multisite network. I think a ton of my type of bloggers will use this to grab photos from all around the web.

I believe this is what is considered "Hotlinking" and is highly discouraged if not downright illegal. If members of my multisite network used this, could I be liable for it? What could happen to me as a result?

If there is a lot that could be done to me about this, is there a way to remove the "Insert from URL" option from their UI? It is interesting though, because even Tumblr (huge blog network) allows its members to "Insert from URL" and I have seen tons of images taken from everywhere and used on personal blogs there.

Doesn't seem like anyone is doing anything about it. Am I wrong for worrying about this? Thanks for any help and advice you can provide!