Unlawful or illegal?

Following my little *cough* mishap last year, I have been battling with the insurance companies. Believe it or not, the law for insurance companies would appear to differ from the law in every other situation. Let me explain.
As far as the claim was concerned, the girl behind me rolled into the back of my car. She did no damage to my car (apart from scuffing the tow-bar cover), and her car had a small damaged grill where the front foglight should be. At the time there were no other witnesses, and so I knew if she complained to her insurance company, she wouldn't have a leg to stand on.
2 Months later, and a witness mysteriously appears, who saw everything. I argued that surely the witness should have stopped and given details on the day, or they could be any Tom, Dick or Harriet, but apparently as long as she has a witness she's going to win. For this reason, my insurance company are no longer prepared to defend me, and as such I either have to pay costs to go to court myself (about £900) or admit liability.
The thing that bothers me is that once again my faith of insurance companies has been severely dented. Taking legal advice, it would appear that this is a common occurrence. The insurance company can't be bothered to work for their money, meaning the easiest option is to bully the customer into admitting liability, which is what they've done in this case. I meanwhile, do have protected no claims so it won't cost me, but what about the next person? They need to buck up their ideas.
Anyone got any ideas as to what I could do to correct this problem now?