Hi Danny,
I think what has happened here is that you don't have a Rule defined for bugs/all issue types, so when you try to email, InterAct doesn't know what rule to put it through and returns an error. I reproduced this locally and was able to remedy the issue by creating a mail rule on All Issue Types.
Unlike using the global or email-to-case email boxes, when sending an email to a specific work item or issue type you need to create a mailbox for the specific entity type. It's like a workflow rule or other customization in that respect.
So if you have created a Rule on Projects or even Work Items which takes the incoming email and attaches it to a Project, it will not be available to Bugs or Issues. So you need to duplicate the mailbox for All Issue Types or Bugs.
I think the error message could be clearer and will open a bug for that.
Let me know if this helps you to reproduce the issue.
Regards,
David