The error message is not about the .htaccess file being present or used, but specifically about the DirectoryIndex directive therein, which tells the web server what file to deliver (i.e. the blog/index.php) if a client asks for the blog/ directory.
Now it seems that your Apache configuration doesn't allow to override the DirectoryIndex on an .htaccess level, which is a tad too restrictive. If your admins ask why then just tell them it's in the .htaccess that comes with the s9y package. They'll figure out.