Don't Explain a thing.
Do nothing to the logo and submit the job as requested, ASAP. The Boss is not an idiot and when given the job will see the problem and will make appropriate changes. If you only have time for one version, do as you're asked.
If there is enough time, do your suggestion for comparison. Keep it hidden until asked for advice. If no advice is solicited, keep the alternative for your portfolio or the best-selling book about graphic design that you're writing.
Edit: What can you do about the background?
You might be able to do something about the background without compromising the logo itself. Perhaps the boss is less attached to the background than his "pride & Joy" logo that his favourite niece made for him on his 45th birthday. Here are some starters to generate juice. Ironically, there may be more flexibility there.
- Can you shade the corner where the bug is?
- Can you stick the bug anywhere else in the layout where there is less
- Can you treat the corner where the bug is with some graphic element
such as the page turned-up revealing the bug?
- Can you isolate the bug inside a border, a splash, a flash, or any
discontinuity where the bug can be displayed?