It's a very intelligent response, actually.Maybe Mr Race is a more fitting name (I race XFG's, suprisingly. I must say the engine braking is sufficient, I use it when braking all the time
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)
Anyway, on topic.
Stating from the top -
1) You know you have engine damage because you're slower accelerating and have a lower top speed then you would normally have. This is more noticeable on a car you know well.
2) In LFS there is no mechanic spannering option (nor will there ever be one), so the fact you have engine damage is enough. You (as a skilled racer, surely) can be tell when your car is not responding as normal. (such as with toe damage, you end up crabbinig along the road..)
3) It went wrong in one way - You overrevved the engine.
If/when engine water temperature and damageable radiators are introduced, then I guess you could damage your engine by causing it to overheat, but either way the damage needs to be fixed to make it go away (by pitting..)
So I don't understand what the problem is...?