Answer

I only just read it. Somewhat surprisingly, I still stand by what I said. My claim is that, on the principled level, distress due to gender incongruence (whether because of society’s attitude or because of the person’s own psyche) is distress in every sense. Just as insurance can cover psychiatric treatment for such distress, I see no reason it could not cover sex-reassignment surgery. And in my view, the same is true of plastic surgery meant to resolve significant psychological distress.
By the way, only now have I heard of halakhic decisors who permit desecrating the Sabbath in order to drive a woman with facial injuries out of concern for an aesthetic defect that would overshadow her whole life (including marriage prospects). In my opinion, by the way, there is no halakhic basis for this (except perhaps regarding rabbinic prohibitions), and still, it shows you that psychological distress can be given the status of an illness requiring treatment. I’m fairly sure insurance companies do cover cosmetic treatment following an accident and the like.
Of course, this is only a principled statement. You still have to check the policy, what is included in it, and up to what amount. And certainly whether there was fraud here. But those are only technical questions. Here I was dealing only with the principled level.
And two more brief comments to conclude. 1. The article does not quote the court ruling and does not show the context. I would not suggest forming an opinion about it without reading it. 2. The state’s treatment of LGBT people seems to me to be a relevant argument, because the discussion is, among other things, about the question of what counts as an illness and what requires treatment. These are questions that depend on social norms, and therefore pointing to such norms may definitely be relevant and important. I would remind you that in the past even mental illnesses were not considered illnesses. The social norm changed, and following that, perceptions changed, and even legal decisions and insurance coverage changed.
You are right to ask what about a person whose bed is uncomfortable for him and causes severe psychological distress. Intuition says that this is not included in medical insurance coverage, but the precise definition and the dividing line still require clarification.