Well, went for a long ride this weekend, no further problems.
It seems the thing is designed to accommodate different depths, possibly for rebuilding purposes...allowing a clean shaft seal area.
I would say any depth between 1mm-4.5mm is safe. Flush puts the second seal lip JUST at the end of the shaft right at the little bevel at the end of the shaft. This is too close in my opinion. "All the way to the bearing" may work in some cases, but definitely NOT in my case. The official word from BMW is to use the tool which sets it in at 4.5mm.
A theory: With the seal all the way to the bearing, there may not be enough space for the oil to accumulate and flow back into the case. By setting the depth, the oil pools below the seal level. This is just a theory though.
Motorcycles are like chlorine for the gene pool. 8/31/2013