they have rejected claim syaing it's a mechanical fault and only covered for 3 years
WTF ...!!!!
what a load of rubbish - 
Escalate to VW Customer Services - do you have a full warranty etc?
When I had mine fixed, the bodyshop warned me that VW would most likely reject due to this reason (arch liner rubs on the inside of the arch, takes off the paint / anti corrosion coating then the rust starts - hence why its 'mechanical'). Utter BS but there you go.
For whatever reason VW approved my claim without drama so I can only presume it depends on what they've had for breakfast that day or my dealer made a very good case for me. They took loads of pics, paint gauge readings and photographed every page from the service book showing the full VW service history. As I say try going direct to VW customer services or try another dealer.
When I first took it in the dealer said if VW rejected the warranty claim, they would put it through as a goodwill claim via the service dept and would most likely have to pay about 30% of the total cost.
HTH