I don't know if he would have even been insured tbh. After all he was a gelding who was to old to race anymore, so apart from maybe some small appearance fees at Kempton on Boxing Day, or at the Cheltenham festival, he wouldn't have been of any value. Though any appearance fees he earnt would be wiped out pretty quickly by his day to day up keep.
The roumers are to be expected, as people speculate on the net. However as there is no evidence of any wrong doing people really shouldn't be throwing around accusations. It can't be nice for the girl to be accused of something like that, especially when it's a horse that has as many fans as Kauto Star does.
I still think now though in hindsight, that leaving him with Nicholls and letting him get involved in the day to day gallops with the other horses would have been the best for him. Taking him away from all he knew, probably wasn't the wisest move. But that's easy to say in hindsight.