Glad to hear you declined the request!
I would have been surprised if your insurance would have covered you for additional guests due to health and safety, fire risks etc. If in doubt with any future bookings, you can always decline them on this basis. Simply say you would not be covered, nor would your guests.
I also have a small property and my insurance policy states the maximum number of guests covered is three persons. Despite stipulating this in my listing, I still get the odd booking for more than three, so it's an annoying admin exercise, but I'd rather this than have extra people turn up.