This feature is available in all editions.
The Type field is not the same field in stories and defects. So, there is not a direct conversion between the two fields. This is why the conversion is failing.
The conversion from story to defect (and vice-versa) is basically taking that story and saving it as a defect. Similar to creating a new defect with required fields, if those required fields are not populated, then you cannot save the defect.
The workaround is to remove the required Type field from the defect within the project workspace, convert the user story(s) to defects, and then make the defect Type field required again.
A similar request has been submitted to the VersionOne V1 IdeaSpace forum as a feature enhancement request for consideration. Please add your vote/comment on it to let us know if you want to see this feature implemented in the future.