wish I'd read your post first!
The heater control switch on my 2000 528I suddenly doing exactly what your's did, run at maximum no matter where the fan switch was set.
Stupid me, I took it to the dealer before checking Bimmerfest postings. I don't know if your marvellously detailed photos and descriptions would have helped me with my problem but as I've complained to BMW, why should they keep installing a switch that can't last 30,000 miles of benign care? So now I'm out nearly $300 for replacing it.