The coolant level sensor on my e34 is extremley picky. It often gives me BS readings. I've replaced it about three times and at this point have simply given up. The sensors for some reason just give false readings of coolant level. Nothing is a replacement for actually looking under the hood and checking your coolant level.
I haven't figured out how I could disable the sensor, or even if such a practice would be wise. My advice, check your coolant level, if it's fine, ignore the light and just keep an eye on your temperature gauge and coolant level under the hood.