This sounds odd and wrong.
Our house sewer pipe developed a break. Roots from a tree strangled the pipe and cracked it. I actually found the break myself as the pipe was not too deep.
To repair the pipe the old broken section had to be removed and a new section put in place. This involved digging out soil around the broken section to access the pipe properly and to back fill once the repair was complete. As I stood over the area that I had excavated, with the loss adjuster, he confirmed that all of the work that I have just described was covered. They paid accordingly and in full.
If the pipe in OP's case is one for which they are legally responsible (e.g. their sewer pipe) the breakage of that pipe is an insured peril and all of the direct costs involved in repairing it including replacing the broken section should be covered. The excavation required to get to the break and the logical back filling are directly connected to the process of repairing the insured event.
Years ago our mains water pipe from the street broke near the front gate. The plumber had to break the ground and remove the soil to reach the break, replace the broken section, back fill the hole and reinstate the concrete. All of that was covered. So, what is the difference in principle with OP's situation.
I am very sorry to say it but the level of incompetence that I have encountered with some insurance companies in recent years is truly dreadful and that extends particularly to interpretation of policy cover. I would expect full indemnity in this case and insist on insurers explaining how the full repair is not covered i.e. show you where the policy wording has the restrictions they suggest as distinct from their interpretation of the policy wording !
It might be worth OP's while retaining his own loss adjuster to advise as I suspect that the repair costs might be large and proper advice / representation may be worth it to deal with the insurers.