Well thanks to the help of finnbmw and others here I picked up my repaired X5 last night from the dealer with all of the work comped (even though I am out of warranty) apart from a minimal $250 gesture from me!
There's probably a few lessons here so I thought I'd tell the whole story.
Last Saturday my 2004 X5 died on the freeway shortly after starting up. Typical symptoms, white smoke and then engine failure. I had the car towed to my local repair shop - not the dealer - who diagnosed the oil separator issue and who gave me news that my engine was seized and that I was looking at a $12-$14K repair for a new engine.
Based on the links that finnbmw found, I called BMWNA and spoke to one of their reps. I explained what had happened, mentioned that I'd seen service bulletins about heated wraps and asked if they could do anything to help. The rep asked if I was at a BMW service center, I said no and he said I'd need to get it looked at by an authorized service center before they could comment and suggested I take it back to my dealer. I asked if he could tell me if there was any chance of relief because I didn't want to tow it to the dealer simply to be told it was going to be $14K. He said he couldn't comment, but then asked me to hold and went to talk to his manager. He came back and said, "my manager thinks you should get it towed back to your dealer."
So I take the car back to the dealer. It is now Tuesday afternoon, the service dept there says they can look at it on Wednesday. On Wednesday evening, they call and say they've been too busy but can look at it 1st thing on Thursday. Then on Thursday morning they call and tell me that the insulated wrap was installed but the heated one was not installed. They've discussed the matter with BMWNA and have decided to fix everything at their expense and only ask for $250 from me to cover towing expenses and "goodwill."
They don't mention the seized engine and I picked my car up Thursday night.
While I am ecstatic about not having to pay for the repair, I am also pretty pissed off at my local shop because clearly the engine was not seized. Obviously this was a rip-off attempt and I'm just lucky they asked for too much so I felt the need to contact BMW. Ironically this shop - Autopia - promises "service you've never dreamed of." I think they're right, I never dreamed someone would try to sell me an engine I didn't need.
At any rate all's well that ends well and so thanks again finnbmw and thanks BMWNA and Motorwerks BMW. I'm glad there are people and companies who do the right thing.