My experience with mechanical issues and insurance...
Sorry that happened to you...it really hurts.
I had an engine mount give away causing the engine to rock and the fan hit the guard sending pieces into the hood. The insurance company covered the hood because it was caused by flying dibre but not the fan assembly because it was a mechanical failure.
If the fire was caused by mechical failure, the insurance company may be correct in their assessment.
Your better bet may be with BMW and by raising the issue with other boards to find similar occurances like yours.
Best of luck to you.