My first observation on this subject is why are they asking you to pay for the damage and not the insurance excess. The dealer has a duty to ensure they take you out in an insured car...either they claim off the insurance OR it wasn't insured, so which is it? If it wasn't insured then, harsh at is for them, thats their problem not yours...but if that is the case then count yourself lucky you didn't have an accident and injure a 3rd party as it may then have been your problem!
I'm not going to pretend to be an expert in this but, if you didn't sign anything at the start saying you were liable for any costs or excess and if you didn't confirm the condition of the car before you went out, then regardless of whether you did the damage or not, it's not your problem.
I'm not an unreasonable person but they're trying to get money out of you without having completed the necessary paperwork up front to make sure YOU knew what the risks were. Therefore, I would personally dig my heals in and also would definitely go to another dealer if you want to buy a BMW - this is no way to treat a potential customer. I know you said you know people at the dealer but come on...if you buy a car from them after they've attempted to do this then how will they learn that this isn't how to treat customers.
Of course, all of the above would be irrelevant and it would be entirely reasonable to expect you to pay for the damage (or, more specifically the insurance excess) if they did explain the risk before you went on your test drive and you signed documentation to confirm you understood it.
I remember an instance when I was younger went with my dad on a test drive of a BMW 325i (back in 1995, it was an e36). My dad crashed the car and put it in a ditch and it was entirely his fault for driving too fast on a wet road...yet the dealer, Blue Bell in Crewe, didn't charge a thing.