I went to Preferences and clicked on "Reset Preferences On Quit", but that did not help.
I just tried resetting the colour to RGB from Interlaced but that did not help.
I just noticed that I cannot use this watermark anyhow. It was made for Stockbox Photo software to automatically place it over images, and it worked fine on my web-site. Problem is sort of solved for now.
I tried Lightroom and it inserting the png. file worked fine!
Why is MrDill marked the answer? That does not provide a fix for the error received in Photoshop nor does it explain why this error is happening...