Sometimes the OEM Tech Support will allow you to RMA only the bad part for replacement, especially if they walk you through testing to determine it's bad. I don't know how Costco's Support provider handles this, but you might ask for a supervisor to discuss how you've already determined with certainty the drive's bad.
I would also try booting the HD Diagnostic
extended CD scan to see if it's reparable, although I'd never trust the HD again so it's more a formality.
Now might be the time to shop for an SSD which is the one hardware upgrade that can greatly increase performance and speed. You might do this at the same time you're RMA'ing the HD you're owed to use as secondary storage when it arrives.
Whichever you decide you'll find everything you need here to get a perfect Clean Reinstall - Factory OEM Windows 7