I do not think an Auditor would object!
The donor has allocated funding for insurance so why you would not use the money for that purpose? the project will run into problem when audited by the donor which is even worst. If they prefer to go for something higher than those provided by AIT, it is fine if they have a budget allocated for such purpose by the donor. In fact, they canopt out from AOT's plan, if they wish, in this case. I think this is out of our judgement?
Anyway, in term of risks, researchers/scientists take more risk than office workers. No one would deny that! you can get your auditor to talk to me. But this argument may not be necessary for this particular request where the donor explicitly set their standards with money provided by them.