It's based on a random chance percentage each time you start SH3 via SH3Commander.
I personally use the malfunctions & sabotage setting but only ever start my game via Commander when I have finished a patrol.
As for being realistic, within the limitations of the game it does a very good job and I would advise any one to conduct 'shake down' drills just after leaving port.
Things that can be affected:
Engines
Batteries
Optical Scopes
Flak Guns
Crash Depth
Max Depth???
I'm sure there are others but you get the idea.
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