A couple of things here: First, you are probably more sensitive to it because of the experience in your family’s past and you do not want to accuse anyone of something, especially since it probably is innocent. However, you do have to protect your daughter and if you are uncomfortable and don’t do anything and something DID happen, then you would feel like it was your fault. He is doing this IN FRONT of you, not hiding, so it makes it much more likely that it is innocent.
I think it is perfectly normal for grandparents to rub their grandkids feet, backs, tickle them, etc. My grandmother ‘scratched my back’ for me for years, and my kids still ask for me to scratch their backs. I sat on my grandfather’s lap for years and he would rub my leg or back while he sang to me. It was all perfectly innocent.
That being said, I think your daughter is getting to the age where she is too old to have anyone put their hand up her shirt, even if it is in the back. Girls start puberty as early as 8 or 9, and you don’t want her to become comfortable with grandpa doing it and then she doesn’t know how to react when someone else does it.
I think when talking to your father in law, you should present it that way. “Sally is getting older, and we want to make sure that she knows what is okay and what is not okay coming from adults. We had a talk with her about appropriate ‘touching,’ and it would help if you would make sure you don’t do that any more so she is not confused.” Or, if your husband is close enough to his dad, and you don’t think it would cause trouble, have him just be honest: “My wife is a little uncomfortable with how affectionate you are to Sally now that she is getting older. Could you please not put your hand in her clothes?”
Either way, it is important for you to have open dialogue with your daughter. She needs to know that an adult should never touch her on any part of her body that a bathing suit covers, and that they should never show her theirs. Of course, I also tell my kids that anytime someone tells them “you shouldn’t tell your parents,” that is a sign to tell the parents right away!