Most dealers make you sign a "Hold harmless" as part of the service contract but the advice to agree to nothing, sign nothing and basically do not even TALK to the dealer without professional legal advice (An attorney) is good.
As for your insurance company.. That too would be a good idea but in this case in most if not all states your insurance should not apply... but they do have good attorneys who may be able to assist. It was in the custody of the dealer at the time.
Finally IF it is decided to fix, and not replace.. DO have an independent inspection done by a competent inspector. and if possible get the dealer to pay for it.
