So to clarify the firmware DOES NOT lock up all the time (if ever). The first version that shipped did have a stability issue that affected some people quite badly but this was completely resolved with v1.25.
Secondly, a lock up CANNOT kill the hard drive. However, a failing hard drive CAN cause a lockup.
I think you have this all backwards, and before you say it, the fact that your hard drive failed does not make us a bunch of tossers. As car player customers are well aware, a small percentage of hard drives always fail within their first few weeks of operation. As a rough estimate from the number of Karmas we have manufactured so far, I'd guess we must have several hundred failures by now. As an interesting point of reference, I'm informed that Rio's return rates are the lowest in the industry.
Finally the hardware was NOT designed at "empeg towers", although requiring a paperclip to access a hard reset switch is not exactly unusual. Recovering from a hard lock up is by definition impossible without a hardware input - in this case, the reset switch. We already have a software watchdog.
Finally finally, I wouldn't have thought you would have any problem getting the player replaced under warranty, even if you bought it on eBay. If you have difficulties with a support droid just ask to get the issue escalated.
Rob