I suspect that legally; and it'll probably need to end up in Court to get a definitive precedent; the question is this, 'who sold you the O2 SIM was it Virgin Media or O2'?
If it were O2 then surely, you would have been in negotiation with them directly, if it were VM acting as an 'agent' for O2 then responsibility for it rests with VM. Whatever backroom deals have gone on between VM and O2 are not the concern of the customer - neither can VM, if indeed they were the seller, simply wash their hands and claim that they can't or won't or are too incompetent to subsequently deal with it. Especially as the letters from them specifically state that the customer can cancel the O2 SIM part of the deal without penalty. So who, then is responsible?
You know this has all the making of a spectacularly expensive legal mess being dropped on VM's head from a great height, and personally, if I were a VM employee publicly posting on here, I'd stay as far away from commenting on this subject as I possibly could - it's probably not going to end well!