This is expected behavior. The mod needs FFB to be enabled in LFS, unfortunately I forgot to mention this in the README. If you want the LEDs to work with no FFB, switch the FFB on but set its strength to 0 in LFS settings, that should work.
G27 LEDs mod for LFS version 1.99A
WARN: This is a testing version!
OutGauge socket opened.
InSim socket opened.
Named pipe connected
DI> Initializing DirectInput8 interface
Client disconnected from pipe.
InSim version: 0
ERR: Error reading InSim packet.