Generally speaking, extended warranties are a terrible deal and should almost always be avoided. They are a huge profit center for the companies that offer them, which should tell you almost everything you need to know about how much value most consumers get when purchasing them.
This is correct, and the old adage applies - only buy insurance when you can't afford the loss. This usually doesn't apply to most consumer goods.
To your second question, no I don't believe the offer is fair. They are replacing it, but it is not being replaced at "no cost to you". Since the amount being disputed (over $500) is non-trivial, I would probably push the issue. Don't waste your time on the phone with a customer service agent or a supervisor. They have probably given you all they have the authority to do. Rather, I would look at the terms of your agreement and specifically legal disputes. The odds are you probably agreed to binding arbitration in the event of a dispute. The agreement will outline what steps need to be followed, but it will probably look something like this.
1. Mail the Nordic Track legal department outlining your dispute and indicate you are not satisfied with the resolution offered.
2. Open up a case with the AAA (American Arbitration Association), along with the required documentation.
3. Wait about 4-5 weeks for a case to be opened - at which point someone from Nordic Track's legal department will offer to give you the new model at no cost to you. They certainly don't want to spend the time and energy to fight you over $500.
4. Enjoy your new Nordic Track at no cost to you.
I recently entered binding arbitration against a fairly large and well known company that screwed me over and refused to make it right. In my demand letter, I made a pretty sizeable request that included compensation for my time and frustration. Once it hit their legal department, they cut me a check - no questions asked. It was far cheaper to settle with me than to send their legal team to defend them in the arbitration.