I don't think Verizon would intentionally try to lose business for themselves.
Verizon doesn't use GSM, at all. Only in some new phones they came out with where you can roam on GSM INTERNATIONALLY ONLY.
if you wanted them to activate your old phone and they said NO, its probably because your phone was made in 2001 or earlier. 2002, maybe. as well. I believe as of some time in late 2003, all new cell phones had to be E911 complaint.
This was a law passed by the government allowing emergency rescue services to locate you more easily should you call 911.
for verizon, the phones had to be "tri-mode", or dual mode digital. that means your phone had to be 800 mhz analog, 800 CDMA, and 1900 CDMA/PCS or just 800 CDMA and 1900 CDMA/PCS (all digital)
its likely that your old phone is just 800 mhz analog and 800 mhz digital. that's why they won't do it.
as for getting your phone fixed -- even if you don't pay the $5 per month insurance, most phones should have a 1 year warranty and 2, verizon does offer a great upgrade program, allowing you a $100 discount off the new customer price every two years if you sign a new contract.
hope this helps,
kevin