How can a Muslim be shy before Allah – Glory be to Him – even though Allah sees him in all his states, unlike a Muslim's shyness before his fellow human being? Is this shyness rewarded?

Linguistically, "hayaa'" (modesty/shyness) is a change and brokenness that afflicts a person out of fear of dispraise. Religiously, it is a characteristic that prevents one from committing indecency and falling short in fulfilling rights. A hadith has been narrated recommending modesty before Allah as one would be modest before a righteous man, which implies avoiding both outward and inward sins. Modesty before Allah Almighty is obligatory even in solitude, for Allah is most deserving of it, and covering oneself is an act of obedience to Allah, not an attempt to hide from Him. What was mentioned in the question regarding acts such as relieving oneself, sexual intercourse, and bathing while uncovering the awrah (private parts) has no bearing on the essence of modesty, as these are known matters that necessitate uncovering the awrah. However, excessive uncovering of the awrah or toying with it indicates a lack of modesty. Some of the pious predecessors exaggerated in their modesty before Allah even when relieving themselves and bathing, but this is considered a supererogatory virtue and not a necessity for all people. The important thing is to guard the awrah and not to engage in anything that is religiously indecent or morally repulsive. A weak hadith has been narrated prohibiting nudity during defecation and sexual intercourse, so it is not to be relied upon.