I believe you are running into a protection check, or something. I've encountered similiar in my setup. (Actually, worse, as I can't directly use my CD drive in UAE - seems to be unsupported). How is one to install OS 3.9 on UAE if one can't use the CD/ has CD check fail?
I had always thought the answer was buy Amiga Forever.... (Which I plan on anyhow, but seems there should also be another answer.)