The DME is probably a better suspect, but the insurance company could be lying or confused as well. It's entirely possible the DME did get told by the insurance that it wasn't covered. Or the DME described it so badly they didn't understand, etc.
If you're only going to use the CPAP on battery power at home during power outages, rather than lugging a battery around while traveling, you can make a MUCH better and cheaper home emergency power supply with a deep cycle marine battery, a good charger, and the ridiculously overpriced ($90) ResMed DC adapter. (I see the bastards have raised the price.)
The downside is it's heavier (about the size of a car battery.) You can also spill the acid if you turn the battery over. Put it in a cheap battery box and put it somewhere you want kick or turn it over. You have to check the water every 6 months or so. However, you'll get 4 or 5 nights of power and it's a lot cheaper. Especially since almost all of these kinds of batteries die after a few years, just like a car battery.
However, the insurance probably won't pay for it, but you might very well get it cheaper than the "official" batteries after copay. Especially if you can get the insurance to buy the overpriced ResMed DC-DC converter.
There's also a Sears 1150 jumper battery that's around $160 that would probably power your CPAP for a night if you turn the humidifier off. It produces 120V AC, so you don't need an adapter. This is safe for the S9 series CPAP, but some of the older CPAP machines such as the S8 series may have problems.