I certainly don't have all the details but just an opinion:
Dean, with good intentions, recorded a quite acceptable album at little cost to keep the Jan & Dean name active in a very volatile marketplace. In an era where artists were expected (perhaps contractually obligated?) to release two or more albums per year, a year out of the market was an *eternity*. Jan, used to calling the shots for many years, hears an album vastly different to the familiar Jan & Dean sound. It's not surprising Jan's original reaction is to reject the album.
Listen to Jan's initial recordings post accident -- it's the familiar Jan & Dean sound with some current updates (sitar, lyrics). Later the songs were quite different both lyrically and sound-wise, reflecting the pop sounds of the day. Finally, the recordings take on a nostalgic flavor, reflecting the "roots" revival going on in the late sixties and bringing back a little bit of the Jan & Dean sound.
In a way, "Carnival Of Sound" is a microcosm of what happened to pop music during the years 66-68. I'm sure that Warner's decision was based, in part: this album is too schizophrenic for today's (68-69) market.
Today (2010) such notions are put aside and we can fully appreciate "Carnival Of Sound".