So the toggle is working as intended. It's labeled the "Nude Sprites" option and not "Nudity" after all. It affects a few CGs as well, but those were some late-development additions to the Gavin path and were non-sexual scenes that don't include content warnings. 

Our thinking was they'd mostly be used by two types of readers:
A) Readers who wanted to turn off all the sexual content in the game and would be flipping on "sex scene skip" as well
B) Readers who were reading for everything, including the sexual content, but were a little distracted by Margaret's nudity during long stretches of the Gavin path and/or wanted to be able to play those scenes while not in private

With that in mind we didn't cover up any of the nudity in the sexual scenes. If you were a type (B) reader we thought it might get annoying to keep toggling the nudity on or off for every sex scene. 

It sounds like this didn't match with your expectations of what the option toggle would do. It sound like you were hoping for an option to just turn off nudity in all portions of the VN?

(and thanks for the praise!)