I think its a vastly superior translation, since it doesnt require inserting the action of wearing, which is nonexistent in the Russian sentence, and doesnt drop the notion of 'on', which the Russian sentence has. Depending how strict you want to be I would not object if 'She is wearing...' was actually marked wrong. That the better translation is marked wrong is indicative of the incredible need for improvement in some of these upper-level sections.
I am a native English speaker. This sentence does make sense, and is a possible translation, as far as I can tell. As mac_64 said, it could imply that the dress was simply draped over her. It would also suit a situation that refers to a clearly female statue with a dress on it.
It would be an unusual sentence, but yours also sounds very odd, as we normally move "on" to the end of the sentence. Nevertheless, I think they should all be accepted.