First, girlysprite, congratulations on your new baby!!
There could be a lot of reasons your SIL did this. But it sounds to me like a classic case of good old jealousy. But no matter the reason, (I think) it's pretty insensitive and in poor taste to go on about such a topic under the circumstances. Let's all say it together: In! Appropriate!
I think your husband handled it about as well as any one could have. There's that technique on here called "beandipping" where one changes the subject (other posters are more experienced about how to deploy the maneuver; I'm still learning) but essentially you just ignore what they say and change the subject. OR, you can use Complete Silence, where you cease speaking all together and just stare at the speaker and say nothing until they (hopefully) realize they stepped in it and either apologize or run scampering from the room.
But the excuse and quick exit your husband made seems to me like a perfectly reasonable and effective way to go. I take it that this conversation did not happen in front of you (I certainly hope not!). Depending upon how close your DH is to your SIL (is she his sister, or wife of his brother, or the wife of your brother?) or how they're related by marriage, perhaps, if this continues, he could pull her aside discreetly and gently - but firmly - point out that this topic is very upsetting for both of you and you would both appreciate it if she didn't bring that up in either of your presence again?
Now personally (and this is just me here) I find the topic rather too distressing to discuss in any kind of a social context - and I would rather not hear about such tragic things unless it was very relevant to a particular conversation. My goodness. There are just some. things. you don't bring up at certain times!!!!
Jealousy, I say. She probably is not even consciously aware of it. I'm so sorry about that.
But, again, congratulations on your new beautiful baby!!! Yay!!!