Apple didn't explain the problem with these hard drives, apart from the description you can find in the replacement program website > http://www.apple.com/support/imac-harddrive
When I took my iMac to get the hard disk replaced because of the same problem, a Genius told me more about the replacement program. It appears that it's a problem which only affects to the 0.2% of the hard drives installed on iMacs, but because of security, near all of them are being replaced. She didn't told me anything about the cause of the problem and I couldn't find anything, but Apple takes the old hard drive to "diagnose what the problem is with the hard drives".
As Apple will take the hard drive, I recommend to erase it with a security option if you are paranoid and you don't want that Apple accesses to the data (if they do it).
Respecting to problems after the repair, my iMac came perfect and it was repaired without any problem. Furthermore, Apple installed OS X Mountain Lion on the new hard drive in order to make the restore much easier, because I made Time Machine backups instead of clones.
I reformatted the internal drive when I bought this last year. The drive has not given me any trouble.
What exactly is wrong with these drives and is the issue an extended time problem with drive?
Do these drives start to fail as they get filled up with data.
I have backups of all of my data using CCC.
Should I risk having a perfectly running iMac on this "free" replacement that could, potentially, end up being not free for me, at all.
As they are defective hard drives, nobody knows when they can fail, because a defective hard drive may start failing at any moment.
As far as I know, after every repair, the Mac has got a 90-day warranty, so if you have any problem with the Mac, it will be repaired for free. However, I'm not sure if this applies to replacement programs
I decided to have the replacement soon after I got the email and am pleased that it went without a hitch and I was actually quite pleased to get the opportunity to update an apparently healthy drive.
Like you, I'd experienced zero problems with mine, but figured with the Mac approaching three years old hard disk failure was an increasing possibility. It's a bit of a cliché but there's an argument that says 'there are two types of hard disk - one's that have failed and one's that haven't failed... yet'.
I felt, maybe wrongly, that the part most likely to fail over time would be the hard disk, so I hoped in having it changed I may have prolonged the life of my Mac.
I'm not aware of many concerns from people who have the replacement. What I have seen are a few threads where users had problems restoring their data, discovering that the Time Machine backup wouldn't work .
I keep TM backups and a daily Carbon Copy Clone. I used the bootable clone to restore as it's easier to confirm that you have a rock solid backup by testing it before sending the Mac off for repair. Once I got the Mac back (which took two days) I did the restore and and hour later I was back in business.
Once I had the machine running for a while, I noticed how quiet it had become! With the previous HD I'd always been able to hear the occasional rumble as it did its work and just thought it was normal noise - perhaps it was. Now, I'm hardly aware of any sound coming from the drive.
So in short, I'd recommend putting your worries to one side and have the work done. I believe any repair they do is guaranteed for three months as well (not 100% sure about this).