From the Instagram TOS[1]: "5. We reserve the right to force forfeiture of any username for any reason."
Not saying that this isn't terrible customer service by Instagram, and they definitely should have given better notice, but when you agree to these terms of service you accept that THEY OWN your username... You signed up for this; it shouldn't be a surprise that they actually have these terms for a reason.
TIL Github can terminate your account, for any reason, at any time ..
GitHub, in its sole discretion, has the right to
suspend or terminate your account and refuse any
and all current or future use of the Service, or
any other GitHub service, for any reason at any time.
Such termination of the Service will result in the
deactivation or deletion of your Account or your
access to your Account, and the forfeiture and
relinquishment of all Content in your Account.
GitHub reserves the right to refuse service to
anyone for any reason at any time.
Besides completely agreeing with that, I wonder how much can you complain about a service not tied to fees or contracts. The same goes for github, gmail, etc... everybody assumes them for granted.
I would imagine that the policy was put in place to eliminate trademark name squatting, and has probably been abused by someone internally at the company for whatever reason.
Not saying that this isn't terrible customer service by Instagram, and they definitely should have given better notice, but when you agree to these terms of service you accept that THEY OWN your username... You signed up for this; it shouldn't be a surprise that they actually have these terms for a reason.
[1] https://help.instagram.com/478745558852511