We are sorry that you are seeing issues with Automatic OS Upgrade for your image.
Only certain OS platform images are currently supported. Custom images are supported if the scale set uses custom images through Shared Image Gallery.
You can find more details on Requirements for configuring automatic OS image upgrade as well as Service Fabric requirements in this document: https://learn.microsoft.com/en-us/azure/virtual-machine-scale-sets/virtual-machine-scale-sets-automatic-upgrade#supported-os-images
Please double check if you meet all the above requirements and if you are still seeing issues, let me know.
Difference between Upgrade and Reimage:
Upgrading will apply any changes that were applied to the scaleset as a whole. So for example, if you apply a custom script extension to VMSS1 you need to update the VMSS instances in order for that custom script to actually be applied.
If you select reimage, it will remove the VMSS instance and replace it with a brand new one. This can be used if you are having issues with a single instance and want to essentially delete it and redeploy it.
Few more articles on this which you might find helpful:
https://negatblog.wordpress.com/2018/06/05/updating-a-scale-set/
https://negatblog.wordpress.com/2018/06/05/reimaging-vms-in-a-scale-set/