That is probably it. On 3.1 you have to change it in the actual CD0 device file yeah? Not in the tooltype for the icon information like on 3.5+
Yes, you will probably have to use a text editor to change the Device = SCSI.device parameter, if this is the problem. Double checking the same file on your old HD with OS2.1 should remove doubt.
EDIT: oops, you've already done this.

Wait, you've read the text in both files (not the icon info) of both HDs and they both use the same device?
I've used AsimCDfilesystem in the past. It's good AND it handles long file names well (part of its charm). It also installs a lot of bloat! I mentioned BetterWB many post ago. It also is supposed to come with a CD files system (and a CD player, etc) that can read PC-style long file names. I haven't confirmed this yet, but, it sure looks like a much cleaner installation and solution.