Here is the item again:
When Kate saw the grayish worm on the dissection
tray. (A)
She folded her arms (B)
and refused to pick up the scalpel
(C) even though she would
earn a zero in lab.
You correctly realized that the period after tray created a fragment. When Kate saw the gray worm on the dissection tray is a subordinate clause, so it cannot stand alone as a complete sentence.
To fix this fragment, you chose to do this:
When Kate saw the grayish worm on the dissection
tray, she folded her arms and refused to
pick up the scalpel even though she would earn a zero in lab.
You have correctly employed Punctuation Rule 2:
Subordinate clause + , + main clause.
Continue making that beautiful music!