Insim could detect the accident, more or less. It would not know how big the accident was and whether engine damage would be realistic, and it would have no way of applying the engine damage except to tell the driver "dont go over 120mph" or something.
Engine damage is just one of the many small details that all sims including LFS miss, things like dirt on the track and variable track temperature. My biggest gripe with all sims is that they focus on making the car physics more realistic when at the end of the day the computer<>human interface is inherently unrealistic anyway.
If push came to shove I would sacrifice some of the physics for elements I figure are more important, like varying brake temperature, and cars bringing dirt onto the circuit and following cars clearing it.
One of the biggest problems with LFS is that all the physics calculations are true to life, which means that anything that is not factored makes the final result inherrently unrealistic, but that point of view would be too unpopular with the die hards to bother arguing around here.
I think it's more important that the 'gameplay' details, like engine damage and the things mentioned above, are simulated than the accuracy of the cars physics which I interact with in an inherrently unreal way (computer). That's what I think anyway.
There is still not a single sim that makes the environment interact properly with the players, the environment is this static thing that we drive over.
I want to see marbles off the racing line, and I want sand traps that rut and drivers who spin their wheels sink in to. I want marshalls to come running to recover my car, and I want to see marshalls waving flags.
It's things like that which make the simulation feel more real, the interaction between player and environment which at the moment in all sims is completely stale.
I watched some racing this weekend, and whenever a car left the circuit they would slow up a lot to rejoin because the tarmac was higher than the grass. When they rejoined they dragged dirt with them, and the following 7 or 8 cars would often step their back out as they crossed it until the dirt was clear. To me these details are more important than the accuracy of the body roll calculation.
I can understand her point of view perfectly, though. I really have to tell myself "okay, don't turn on the computer tonight, spend some time with her, watch tv together etc etc" 
