Possible mould damage from burst pipe
The inside walls of your home will have mold spores from day 1 keeping the home well ventilated and dry keeps the mold from growing.
If you look in your attic you will probably see some black spots that’s mold.
Mold needs moisture to grow if the wall is dry it won’t grow so at this point if the area is dry there won’t be mold growing since it sounds like there was no insulation to hold the moisture.
With that information having remodeled many homes both for myself and professionally the insurance company is most likely right.
They would not want to have the wall covering to start failing when it could be a cause of this pipe failure. And further damage resulting from not doing things right the first time.
So I believe they are correct and you will have no problems.