How long does it take for a character to get transfered to town after you disconnect while in an instance

It depends on what you are looking for.

When I started playing, all I wanted was scrolls (wisdom and portal), magic and rare items. So I picked up pretty much everything and sold all the items I didn't care about.

Right now, I'm more looking for shards and orbs because I'd like to enhance my gear, and in order to obtain those, I have to follow the famous vendor recipes.
For instance, I need Armourers Scraps and Blacksmith's Whetstons which require superior quality equipment, and also Chromatic Orbs which require items with 3 slots of 3 different colors linked together. In addition of that, I also pick up blue stuff (4 or less slots, like ChrisHateZ said) and yellow/orange stuff when I can find some.

I identify everything before selling my stock because

1. Scrolls of Wisdom can be found super easily
2. You can get more interesting stuff by selling identified items (once again, check the vendor recipes)

So what should you pick up ? You should pick up what you need: powerful gear (blue/yellow/orange) and everything that might be necessary for one of the recipes you are following.

All party members can see all of the drops. The drops (at least the non-junk stuff) can be flagged with one of the party member's names when it drops. The player that is flagged on the piece of loot has approximately 3 seconds to loot it before anyone can loot it.

Each loot item will appear, in the world, with a timer bar and the flagged person's name. If it's not flagged to you then it appears in a faded-out color (until the timer expires).

Here's a screen shot showing the timers:

I snagged the screen shot from this video.