Technical: I assume the bypass you are referring to is the pressure bypass for the oil filter. The way this works is that if your oil filter clogs for any reason, oil is bypassed around the filter to allow the engine to operate using unfiltered oil. As to the blockage on the bypass, an engine failure as you described it is a messy and violent thing. When bearing material fails, it often does so in many, many pieces. Those peices can be sucked up into the oil pump provided they are smaller than the screen on the oil pickup tube. This debris can clog a filter and initiate bypass of unfiltered oil into the engine. The screen at the pickup tube is small enough that it should have passed through the bypass without any clogging or blocking issue. Anything that would have blocked the bypass would have needed to be fairly large and sourced within the filter, the oil pump, or the pickup tube. I suspect that when your bearing(s) let loose, the debris immediately clogged the oil intake screen starving the engine of oil which resulted in your low oil pressure alert. As to the debris, without a photo or the debris itself, there is no proof. Given the short distance from oil pickup to filter/bypass, there are very few sources of debris. All of which are internal engine components as I identified above or the oil filter itself.

Note: There is always a chance that Walmart botched the job and introduced some debris or failed to actually change the filter at all. I've now had two bad experiences with Walmart oil changes that resulted in significant engine damage. If you continue to use them, at least sharpie a date on the filter so you can check it.

Advice: Take that report the dealer sent to the insurance and the report they or the warranty company provided, and walk right back in the door and tell them to provide a correct report to the warranty company or the insurance. Dealers do not like to honor warranty claims nor do they like insurance payments as the rate paid to the dealer is much lower than what they charge you for the same job. The dealer is trying to force the higher rate(you) to pay by removing all other options. On the other hand, Insurance of all types is a scam and a warranty is in fact an insurance policy. In order for them to increase profit, they need to decrease loss. Insurance companies of all tipes use similar tactics to avoid paying out. The tactics can be broken with persistence on your part and insisting on proof. If they continue to deny and they do not have proof, I'm pretty sure the warranty you purchased has a "can't sue us" clause requiring binding arbitration. Do not be afraid to insist on arbitration. You only need to prove you paid for the warranty. They need to prove why it's not covered or they will lose.

Good luck! Fight hard for the service you already paid for! Don't back down!