sckeith wrote: I don't know where the block heater is located
It's located on the engine block, roughly behind the alternator.
but is it possible with the engine running and oil flowing the block heater could overheat by not being submerged in oil?
The block heater doesn't heat the engine block directly nor does it come in contact with the engine oil.
Instead, it actually heats the coolant which in turn heats the engine.
300winmag wrote:Either that or they don't want somebody to drive away with it still plugged in.
That's probably the most likely reason. Operating the block heater while the engine is running won't have any adverse effect.