Whether legal, or not, in reality "inactive" HOAs do exist. I'm aware of a number of 2-on-a-lot townhomes where owners have at some point ceased acting as an HOA.
Property insurance, for hazards and liability, is usually the first messy part of that decision. Many insurance companies will not issue a policy for a portion of an association. Liability lawsuits may well be the primary reason. While two neighbors may agree to be "inactive" that will not prevent a visitor who trips in the common area driveway from filing a lawsuit against the HOA, and both neighbors.
Another problem which may arise has a direct impact on property values. If there's no active HOA, there's no corresponding reserve account. When one neighbor falls upon hard times and can't maintain their half of the HOA, both parties suffer an economic impact. When both homes are on a single lot, buyers tend to look closely at the condition of the neighbor's home. No matter how nice one unit is, if the other one has peeling paint and looks shabby it'll affect the sales price of both.
In a common ownership situation, it's certainly tempting to 'go solo' and not have to deal with a neighbor. The decision involves a lot more than just an insurance policy, though. You've made a wise move by stopping to investigate before diving in.