Issue or Error? Rant story time!

I was working on a windows desktop app, and everything was ok, you know, tests completed succesfully, all in time, etc. The problem was when we showed the demo to one of our clients. He saw several screens and we explained all the features to him.

Client: *Sees a Error pop-up indicating that a remote service is temporarly unavailable (what it has to happen in order to show him how the system would warn him when an external service is out of service)
Client: What’s that?
Lead dev: What do you mean?
Client: Yes. That’s an error pop-up
Lead dev: Yes, it’s a message that tells you that there was an issue connecting to the bank service
C: No, no and no. Please change it
L: Why? Don’t you want the system to tell you when there is a connection issue and why is that happening?
C: Yes, but my employees could lost their minds because of this class of messages!
L: So...?
C: You have to change it
L: Ok. What do you want to change?
C: First of all, don’t put an “Error” icon, put an “Warning” icon, and instead of “Error” title, put... “Issue”
L: “Issue?”
C: Yeah. Don’t put the “E” word, if the users see an “Error” message, they could think that the program doesn’t work, even if it does work.

We all though “WTF?!”

To make the story shorter, we changed all the pop-ups. That took two days.

Is that correct? I know that “Error” sounds hard but, seriously? “Issue: The remote service is not available, contact your bank?”