I have the same problem, in Word 365. Originally, I noticed it with local .html files. Now I tried .jpg, and get the same error.
Other (or some other?) file types work as expected : .pdf, .txt.

I also did a complete uninstall, reset the Default Apps to defaults, and re-installed office (with reboots between the different steps), but it didn't help.

Some other machines have a similar problem, as described here: pdf - Word 365 hyperlinks open in wrong program - Super User. And some show "no program is registered to open this file" instead of "You'll need a new app to open this about link".

But in all cases, all these files open fine and with the correct application when double-clicked in Windows. It's only the Office hyperlinks that don't work.