My 2cents (Hopefully it helps in some way):
I can see BMWs point of needing to check the engine before they can determine the next course of action. Though RM$10k just to inspect the engine is insane. I'm guessing they've already ruled out that it isn't the wiring? Cos if its electrical it should be easily found out through the ECU Diagnosis which surely won't cost even RM$1K. If water seeped into any part of the fuel management system, this should be easy too, since it's all outside the engine block. Then leaves that the water got through the intake and into cylinders - which would cause a major problem. But the extent of the damage can also be seen just by removing the cylinder head. Just with the head covers off you can see if the valves or valve control are bent. If those aren't, leaves the pistons and crank. This they can just remove the spark plug and do a visual check into each cylinder.
None of them though make sense for price they've given. For that price, people would basically strip every component of the engine. Your dealer should be doing a step-by-step elimination. If it's internals, than the diagnosis should be covered under the labour charge for replacement an engine internal.
Another point, given that they haven't diagnosed the problem, they have no grounds to void your warranty claiming it is flood damage. They need to check and determine what the problem, before they can say it's the flood that caused it.
If it's a design flaw, then I would bring it all the way up to BMW AG even. Malaysia may not be strict, but there are other countries that are. If BMW AG (or through BMW Malaysia), they've been notified and not take necessary action, it leaves them open to lawsuits or heavy penalties from the owners in other countries.
Hopefully I helped in some way, and if I'm wrong in anything above, do let me know..