Re: terms and conditions, one thing you definitely want to make clear is copyright. Essentially, anyone uploading an image should, by doing so, be stating that they either own the copyright for the image, have explicit permission from the copyright holder to use it in this manner, or it is an open/creative commons/otherwise not copyright controlled image. These kinds of Cover Your Ass (CYA ) terms may be critical to the long-term survival of such a system as it could otherwise be easily cut-off from web hosting without warning, or be the subject of a lot of DMCA/take-down notices (at the least).
I agree. In fact, I would probably limit it to public domain/creative commons only, and make the user fill out a credit box with creator info (name, url), and let them check some boxes for the image's license type: BY, NC, ND, SA, PD/CC0 (some of these can be combined, some can not)
This would allow your site to become truly useful as a repository of free images with open licenses and cut down on the legal worries associated with allowing users to just upload whatever they please.
Keep in mind that there are additional concerns with images beyond license type, with regards to signed model releases for images containing people's faces and signed property releases for some objects (like visibly branded items, trademarked items, some buildings, photos of artworks, etc.)