You should find the contract that you signed and abide by the provisions in the contract.
Diabetes is rare in GSDs. This is the first one I have heard of, especially so young. There is no way that any breeder can produce a dog that is free of any problems throughout the course of their lifetime. This is one that we do not health test for, it is not like HD or ED or DM, etc. EPI is much more common.
The breeder offered to replace the puppy. You are choosing to keep the puppy. Depending on what your contract says, the breeder may be more than fulfilling their end of the deal.
On the other hand some breeders will give some sort of refund for a dog that is having issues, regardless of the contract, but that is up to the breeder. Trying to compel a breeder to do something beyond their contract won't work.
Jenna, RN CGC & Babs, CD RA CGC HIC
Heidi, RA CGC
SG3 Odessa, SchH1, Kkl1, AD
Ninja, RN CGC & Milla, RN CGC
Joy, Star Puppy, RN CGC
Dolly CGC & Bear CGC