Sorry, but your warranty company response sounds very reasonable for the damaged flywheel. The flywheel wasn't defective (which is what your warranty covers) but was damaged by heat. That makes it a user issue.

As for the oily plug, killcrap already provided the most likely reason. When the valve cover gasket leaks, oil runs down and sits around the plug. It isn't deep enough to get the porcelain oily, just around the threads. When you take the plug out, the oil runs down and the threads and electrode get covered in the old oil. Not uncommon at all.

If I was you, I would be looking for a new mechanic. Has he even checked for an oil leak around the plug, before concluding that he needs to rebuild the engine? Did he do the test killcrap suggested, or use a boroscope to determine what it looks like inside the cylinder? Start there, and don't plan to rebuild your engine.

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2007 X3 3.0si, 6 MT, Premium, White

Retired:
2008 535i, 6 MT, M Sport, Premium, Space Grey
2003 X5 3.0 Steptronic, Premium, Titanium Silver
2002 325xi 5 MT, Steel Grey
2004 Z4 3.0 Premium, Sport, SMG, Maldives Blue