It doesn't sound like a salvage car. Your insurance company would probably have explicitly told you it was salvage, and the title would've reflected this.
It sounds like you're getting the runaround. MB doesn't want to foot the bill because it claims the car was damaged by flood. Your insurance company will probably say they repaired all flood damage and the problem is not flood related. If that's the case, you may have to sue both at the same time and have the judge figure out who should pay. I may be jumping the gun at this problem, but the key word is "joint and several liability", meaning that clearly you're not at fault because you're covered by any one of two ways, but neither party want to accept responsibility for the contract you have with them.
I agree with M.B.DOC that you should have the converter issue resolved because of the emission warranty.
On a technical note, the converter ceramic monolith design usually incorporates a ceramic mat surrounding the element to keep it from rattling. This mat may have been damaged by being immersed in water.
95 E320 Cabriolet, 131K