I have noticed that several times there are actions or responses that allow you to "ready an exhausted character", but I noticed that the response for the card 'Cathouse' allows you to "choose and ready a character". Does that mean you can ready an insane character just as you would an exhausted character? I'd appreciate any help.

You can ready insane characters yes, but they will stay insane.
Ready a card is not restore this card.

Remember to Ready all insane characters in the Refresh Fase !

... only one is allowed to be Restored but the other, if any, remains ready not exhausted...