Yes, rather ridiculous, since the title goes with the VIN tag, and the VIN tag is on the body...but yet the frame is somehow accountable as well.
The government is trying to keep people from stealing vehicles, or making it profitable to do so, but in the case of the car accident, unless either the frame vin or body vin came back as stolen, there is no law against replacing vehicle parts, but the ins. co. obviously was trying to use that swap as an excuse to get off as cheaply as possible. So what if the original frame rotted out, you don't scrap a good car just because of that.
Unless there is some requirement in your state (wherever the questions exist) that prohibits you from changing parts without being re-inspected, although it would be a hassle, they legally have no leg to stand on IMO. Not that they don't have more money than you and would try and wear you down, but thats another story.
The engine (and tranny) is VIN'd as well, and they could just as easily try to get you for rebuilding the engine and having the head surface decked (thus wiping off the ID markings) as they could for swapping out a rusty frame.
The simple truth is, if none of the parts are stolen, it should not be illegal to change *any* parts (other than the VIN tag, which is illegal period) without having to be re-inspected, and I'd bet thats the case in most, if not all, states.