If you admit that you didn't turn your head before backing up, that tends to show that you were negligent. If you're negligent, then a judge would find that you caused the accident (or the near miss, in this case). And that means a judgment would be entered against you, which the insurance company would pay. When parties are negotiating a settlement, it's common to include language that says paying is not an admission of guilt. Your lawyer should be able to get that type of language for you.
With that said, the police officer can come to court and testify that you told him you weren't looking, so I don't know that confirming it is going to hurt you. You may want to ask why your lawyer wants you to admit it, since that's not terribly common.
The insurance company is paid to insure you against negligence, so that should not be a basis for refusing to pay the claim, but read the policy or ask your lawyer to review it for you.
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