John

This should be covered by any reputable motor trade policy, it comes under section Injury to persons or damage to property due to defective parts or workmanship. This is exactly why you pay for specific motor trade public liability.

We had a similar claim about 15 years ago when a turbo oil feed pipe failed, almost identical to your circumstances. The insures paid for new engine without batting an eyelid so to speak.

Cheers Aidan