In my case I see "DNS resolve has failed" only for machines which are placed under Group with "Always update from Avast servers" checkbox is clear.
But after that failure error display updates are being pulled from Local Update server (located by IP address), you can see the screenshots in attached screenshots.
I guess "DNS resolve has failed" relates to failure to resolve Local Update server hostname.
When "Always update from Avast servers" checkbox is checked, then no DNS resolve error is displayed and updates are pulled only from Internet.