She has done the right thing here. And whether or not I believe her statement that neither dog has HD, unless she has posted the results on
www.offa.org for each parent, I would take that with a grain of salt. She might not have even done the pre-breeding screening for HD, many toy dog breeders don't. And mild HD is usually not noticeable at all in young(ish) small dogs.
My health warranty does not warrant against a polygenetic recessive disease such as ED and HD. I will screen the parents - ie do the testing, but two clear dogs can have a puppy with either HD or ED.
As a responsible puppy owner you did the right thing on insuring your dog against genetic diseases and this breeder is doing the right thing by refunding your whole purchase price back, despite what-ever her health warranty said!
I am very happy this is somewhat resolved for you, at least you will be able to put aside that amount for puppy *extras* that may be needed for his medical care.