Paging Bruce ( @Skylane )  our resident insurance expert.

If this payment truly IS exempt from SE tax (not my area of expertise...)  and you can't get the F.1099 changed; my suggestion is to enter it on Screen 14 as SE income, back it out with an explanation, the enter again on Screen 14 as 'other income'.  

That allows the IRS to do their matchy matchy drill 😉