With all do respect to your thought process, morals, education, life experience or whatever else goes into the making of any decision, I must say that there is "NO" decision to be made here.
The MoCo has made the decision for you and the only thing left is for you to "take action Immediately". This does not mean you are going straight to court or pressing any action from your end, it means you are being prudent and consulting with the attorney and not signing any document other than a repair order to proceed with repair, leaving all legal avenues open to yourself.
An attorney is not advised here, an attorney is mandated here by the gravity of this situation. You are no longer responsible for the safety and well being of yourself and your family, your actions will have grave consequences for every 2007 CVO owner and everyone that is buying one in the future.
How many other agreements have been signed? How many other broken bones, yards of road rash and worse exist out there? If everyone that may have had a seized motor signed an agreement, how would others find out what happened or that a problem may exist?
This is much larger than just your situation. You must retain a competant attorney that is trained in this type litigation. They will face a law firm from the MoCo that will have every possible tool available for litigation. This is not to say that you need to sue anyone necessarily, you just need to CYA and make sure you don't trap yourself in a corner because you fell you are doing the right thing.
I stated in an earlier post that I commend you for taking a civil approach to this. I still do, the civil approach now requires that you retain an attorney, they will get their fees covered in any agreement you make with the MoCo, in fact it would surprise me if your insurance company wouldn't have already started down this path. You have contacted and involved your own insurance company haven't you? This would be very foolish to not involve them as well.
There would be no fall back on you from an insurance company when a "product failure" is the cause.
Our layman's knowledge of the lean condition all of these machines are being delivered with to meet emission requirements would indicate it isn't a stretch to presume that a setting could be off just enough to create the seizure of that rear cylinder.
VW aircooled engine used to blow on compression after getting to hot all of the time. Ask anyone what cylinder they lost in their VW aircooled back in the day, if they respond with anything other the number three cylinder it would surprise me.
All this in the way of adding to everyone else's recommendation as strongly as possible that you "must at all cost" retain an attorney. Imagine if you had a tooth ache and needed a root canal, you'd be at the dentist right now. This could be the worst ache you will ever be involved with.