Contacted the insurance again today to ask WTF is happening. Now they want to know... how much it cost to get the K&N air filter fitted, and what the BHP was before and after fitment! I didn't fit it (and they know this as I've told them 3 times I bought it as-is and they apparently have "a lot of notes".. do duh.. why not read them!?), so have no idea of the cost.. at a guess, probably ~£20 for the filter itself and self fitment seeing as the fella I bought the car off had completely rebuilt the car himself. As for power, again a guess would be a matter of 1-3bhp.. they really are just trying to be annoying now.
That said, they did say they're leaning towards getting it fixed (apparently they don't normally insure modified cars, period) so looks like I'll have to ride this one out. Thankfully I managed to replace the fuel tank and both sets of engine and gearbox mountings on the E30 (not a fun or cheap job at all!) so it's back on the road again and my other half has her own motor, so it's not essential that I get it back immediately... just annoying that they don't seem to work very fast... yet if I wasn't insured and had an accident with one of their clients... my guess is they'd be all over me like a rash.
After it's done, I'll be moving to a different insurance company and will notify them of the modifications so I don't have to go through this crap again if I ever have to.