I feel legally first floor has a right to “quiet enjoyment” and if I don’t respond I’m negligent but if I tell second floor to reign in their kids it’s discrimination.

To not learn them now is simply negligent on your part.

I see this as a tenant negligence for not reporting earlier, and keeping the bathroom wet and damp.  

The adjuster from my insurance company suggested the units underneath me to file claims using THEIR insurance policies since they need to prove I am liable for the leakage (due to negligence). 

  $250,000 invested in US Treasury Bonds at current rates would pay $3,000 or so in a year; an almost negligible amount of income in terms of retirement planning. 

I want to be fair but I also do not want to pau for repairs due to their negligence.

However, insurance is limited because it only protects you from one type of liability: accidents/negligence.

Someone was clearly negligent here, however, I cannot prove responsibility and the blockage was found in unit 1.How would you go about charging the plumber bill?

In other words, in a loss event (fire damage, loss of life, etc), the insurance company would most likely not cover it and you, or the entity that owns it, could be held 100% responsible for damages, negligence, etc. 

Don't forget you are deducting the interest on your mortgage payment from your income right now which will be negligible if you pay off.