I just wrote an article for this month's Underwater Journal (
Underwater Journal) laying out the controversy in diving with diabetes (yes, I am an M.D.). As you have stated the main issue in diving with diabetes is one of hypoglycemia (low blood sugar). The risk of this is extremely variable based on the individual AND based on what medications they are taking for their diabetes. Some of the oral agents for Type 2 diabetes are the worst offenders while others are much less of a risk. My article goes over this in detail.
I don't know about NAUI specifically (the original issue in the thread) but many agencies follow the DAN guidelines outlined above and in my article. SSI even has a form on their website for instructors to give to diabetics and have them sign.
As you've said, in the U.S. you can get sued for anything. The best you can do is take care of the patient (or student in this case) as best you can, discuss all of the issues with them, and then document the results of that discussion in writing. I've learned over many years in the practice of medicine you can't live your life worrying about lawsuits. In our society they are going to happen. Just do the best you can for your patient.