Yeah so first: The problem isn't really with the "emulated CIA".
On the C64 main board the IEC bus (diskdrive bus) isn't directly driven from the CIA, there is a driver chip between the CIA output pin and the actual connector. On the Chameleon V1 hardware the CPLD performs basically this exact same function (it does a few other tasks as well). So a CIA chip can be perfectly fine, but if the driver-chip is broken you still have a none working IEC port. What it really sounds like here is that one port of the CPLD has died and now is permanently stuck at 0. Obviously not the complete CPLD chip is broken otherwise Chameleon probably would not work at all. It is still possible the CPLD is fine and there is a short on the board (a small solder blob or a very small conducting particle, a broken connection or something like that), but my bet is still on the CPLD itself just has lost a working leg.
Now for config options: In cartridge mode the Chameleon does kind of a trick where it reads the CIA inside the C64 and COMBINES the result with its own emulation. This allows real drives to be combined with the emulated ones (with a few limitations). For SX64 users (where the diskdrive is fixed inside the machine and can't be physically disconnected), there is a method to disable the C64 part.
So if it was the C64 side that was broken, it could be disabled and the Chameleon breakout cable be used instead. However there was never any need to disable the Chameleon part of the IEC, so there is no way to disable it in the standard firmware for this specific scenario you encounter. On V2 this option exists as it can be detected if a cable is plug-ed in or not, but alas not on V1.
There is a "drive emulation only" option in the menu "somewhere", but that disconnects the emulated drive and the Chameleon IEC bus from the emulation completely. So instead of hanging forever, it turns into "device not found", so again not really useful for you as a solution.
The only way I can really see trying to get that thing working remotely, as a last attempt, without shipping it across the world, is making a custom firmware for you where the IEC bus of the Chameleon is ignored completely (like a V2 would do without the cable). You won't be able to use real drives anymore, but there is a high chance that the emulated drive will start to function correctly if the signals coming from the CPLD are ignored inside the firmware.
Now if that is something we want to add to the menu-system as an option for all users going forward, I don't know. This specific issue never came up before as far as I know.
