No, it was not a gross overreaction. It is probably a sanitary problem and it probably violates the policy of the rental bike company. If the music video production people did not let the rental company know that the seats would be used in this manner then it is not really surprising that the company was annoyed when they found out.
I do believe that the company who rented Queen the bikes for the "Bicycle Race" video went overboard by charging the band full price for the seats after finding out that naked models were using them. These bikes are their property and, while having unclothed genitalia on the seats could create health safety issues, they simply could have charged the band for extra cleaning fees. I think that the company knew they were dealing with a record label and act who had access to good funding and took advantage of that to refurbish their product.
The company that rented the bikes to the band Queen for the "Bicycle Race" music video was not out of line for demanding the band purchase the bike seats. It is a matter of health and sanitation and it is appropriate for the company to not jeopardize the health of future rental customers.
The video is great and very artistic, but they definitely should have taken possession of the seats. Nobody would want to rent any bikes from them if they knew a bunch of hairy sweaty asses were cycling around all day on them. I am sure the band had a field day though.
If I was the owner of the renting company, I would have NEVER wanted naked people riding on my bikes that I have payed for. This could demote business and people could sew them for letting this happen. Just image, would you want naked models riding on the bikes you payed for?