Typical contractor shortcut. Do you have an outside chase?
The proper way to insulate it would be to open the chase up from the outside, use standard wall insulation between the joists - all the way up the ceiling level in the adjoining room. Then build a (code-compliant) fireblock at the ceiling height, and use approved insulation on top. That creates an insulated envelope that extends the adjoining room's. Had to do this myself a few years ago.
However, you are not going to be able to do anything about cold coming down the old chimney unless you remove it completely. The best thing that you can do right now is to get a very well made set of fireplace glass doors to install across that opening. Don't get the cheap kind, go to a store that specializes in fireplaces. You need something that seals when it is shut. They cost a lot, but you will get it back both in comfort and in cost savings from lost heat through that chimney.
Short term - get a piece of plywood large enough to cover that opening. Wrap an old blanket around it and place it across the opening. Use cinder blocks or something else to hold it in place tight to the wall. It doesn't look pretty, but it will keep the cold air from pouring into the room.
I spent five years screwing around with mine before I got it truly fixed. It made a world of difference in that room. Now you can actually sit in there when the temperature is in the single digits, like it is now. Before you would have to wear slippers and sweaters and use blankets just to be in there.