I don't have an iron in this fire and it's been over 6 months since this event. But, I may have a different angle on this.
There are two reasons why I think NAMBA insurance would cover an illegal boat that is run at a sanctioned event. 1) It was allowed to run at a sanctioned event. 2) I highly doubt the NAMBA rulebook is an integral part of the insurance policy. If it were, the insurance company would have (alot) to say about what's in it, passed proposals would need to be reviewed legally, etc.
It's highly possible the rulebook is/was used for underwriting purposes to determine if NAMBA is a good risk, but I've never seen an organizations rules/by laws actually endorsed into a policy.
The issue isn't about coverage. It's about what happens to the coverage after a catostrophic event happens and the rules weren't followed. Rating surcharge? Cancellation?? Where does that leave NAMBA and it's members? Up a creek. Just one more reason why rules need to be followed.
Put the shoe on the other foot. Say your son was seriously injured by a model boat. One that actually didn't meet the "rules". Do you think you would continue to retain an attorney that would accept NAMBA's Insurance Co's denial of the claim? The driver would get sued, NAMBA would get sued, the CD would get sued, the City/County would get sued, etc, etc, etc. It may not all stick, but you better believe all involved will get sucked in.
We need to follow the rules. If something happens, at least we're following the rules.