Had an update today - they have agreed to waive the £26.50 cancellation fee on the basis that when I applied for cover I used the registration number of the car which their system incorrectly identified as a 328i Sport.
They did say however that they couldn't change their system to include a 328i Luxury saloon because their table data comes from Thatcham who in turn get this from the manufacturers and the DVLA, so it would have to change further up the line. This means there are a number of insurance companies out there who have the same incorrect data. So if you have or are thinking of getting a 328i Luxury saloon, either check your policy wording carefully... or buy a 330d instead!
PS - My registration cert has the car model down as '328i Luxury Turbo Auto' so for once it's not DVLA's fault.