Yes it is correct but this lesson forms the passive using the gerundio so we must use the verb estar. If you keep working through the lessons you will encounter other ways of forming the passive which were not in your book.

Good morning Wendy ...

As Marsha says, "ser + past participle + por..." > "El gato fue observado por el perro" is fine, but "El gato estaba siendo observado por el perro" specifically portrays it as a continuous (progressive) process.

Regarding passives formed using "Estar + [just the] Past participle" [i.e., without the "siendo"], see my question and Inma's answer in:

> Verbs Tenses & Conjugation > Level B2 > Grammar > Library > Learn Spanish faster with Kwiziq Spanish >> Forming the Spanish passive voice with ser + participle (+ por) (passive - simple tenses)

That's what I was talking about.  Using estar seems awkward to me.

That's what I was talking about.  Using estar seems awkward to me.