I think in most (if not all) cases, with the way the feature works, you just discover that something isn't working the way it should. I suspect that much of the "damage" is simulated by altering the files that control the specs for your boat and equipment (for instance, decreasing the max range to simulate a fuel leak, or something similar), so it's not like when you start out with a fully functional boat and then get damaged and the crew notifies you that there's (suddenly) a problem. But I'm not sure since I've never used it myself.
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