If there is a crack in the drain downstream of the trap, that could allow water and sewer gas to leak out.
Regarding the insurance issue: I understand the "four walls" issue raised by the insurance company; however, in the CC&R at my condo, any pipes which serve only one unit are the responsibility of that unit. Only pipes which are "main" i.e. provide water supply or drain to more than one unit, are common area responsibilities. More importantly, my insurance covers sudden or catastrophic damage, such as a burst pipe. It specifically excludes slow leaks which persist over a period of time, and all the damage which they may cause.
Laws, CC&Rs, and insurance poilicies vary widely. You may need local legal help on this one.