This is a tough one. If someone were to ask me ahead of time about co-owning a mare or retaining breeding rights to a mare, I'd say "DON'T". It's just way too complicated, as you've seen.
(I don't know who either party is, so this is just based on what I've read and my own opinions)
I think that the buyer is fully justified in wanting the filly insured. I would want the same thing. I would also want reassurance in the form of a contract that all expenses would be guaranteed. Frankly, trying to get a foal from this horse is a logistical nightmare, and IMO the seller would be much better off to just accept the payoff from the buyer, in installments as needed, and forget about it. Trying to pursue it is going to be even worse than it is now. The buyer is worried about her beloved horse, and expenses, and seller is going to end up paying a possible fortune to get a foal from said horse. Just the breeding costs, mare care, etc. What if the mare needed colic surgery, or intense medical care? Not worth it, IMHO.