Does silicone gasket material destroy engines?

Hard to say without seeing it, but it is indeed common to use silicone gasket sealers with and without rubber gaskets. A rebuilt engine typically is supplied with all parts installed already that can let sealer get into the oil. Mainly that's valve covers and the oil pan. The only thing that was an issue a few years ago was that some formulations of sealants gave off fumes that destroyed oxygen sensors. Most tubes of sealers have "oxygen sensor safe" printed on them now.

Even if a chunk of gasket material broke off, it would have been sucked up by the oil pump and trapped in the filter. It should not have gotten to the bearings. A more common source of the type of failure you mentioned is incomplete cleaning of oil passages and the rest of the block after any machining procedures that create metal chips. Sooner or later that happens to all of us and we simply have to do the job over. That's what warranties are for.

Nope. If that's true, they could be correct, but that housing is normally attached by the engine builder, not the person installing the engine. You typically wouldn't need sealant on that gasket, but even if you did put some there, that stuff skins over in about 20 minutes. If your mechanic bolted that housing on with sealant before installing the engine into the car, it would have had hours to set up, and it's not going to break off and plug anything after that. Even if I could see those bearings myself, it would likely be almost impossible to say who to believe. If there was sealant in the holes in the crankshaft that feed the oil to the bearings, then it would likely be the mechanic's fault. Rebuilders don't run the engine so even if they used the sealant, it would be cured by the time they shipped the engine to you. It's not going to go anywhere after that.

It's also possible WAY too much sealant was used. Some inexperienced mechanics glop everything full in hopes it will squish into places they might otherwise overlook. That could easily plug a passage to or from the oil filter, but then there wouldn't be any pressure at the sending unit and your warning light would have been on.

Either way, it's hard to imagine how the bearings could have lasted for 500 miles without oil. The crank doesn't sit in the oil. In fact, that would cause more problems. The oil sits low enough in the pan to be kept away from the spinning crankshaft and its counterweights. Many engines even use a "windage tray" just under the crankshaft. That is to prevent the wind from the spinning crankshaft from whipping up the oil and aerating it. Air bubbles in the oil compress and reduce its ability to isolate moving parts from each other, namely the crankshaft and connecting rod bearings.

I don't know about your specific engine, but most engines send oil to the camshaft bearings through the crankshaft bearings, so if the passages were blocked enough to destroy the main, (crankshaft) bearings, the connecting rod and camshaft bearings should show similar wear. Hydraulic lifters, when used, typically sit in their own oil passages that aren't fed from the main bearings so they would pump up normally. If they were noisy, that would indicate the oil passage was blocked closer to the filter.

If this engine came from a high-volume rebuilder, they have everything down to a science and they know what to do to avoid problems. For that reason, I'm inclined to agree that the mechanic's use of gasket sealer caused the problem. Still, you have no way of knowing if something got overlooked when they built the engine.

I have an engine that was rebuilt by my students a few years ago. It failed after 40 miles. New crankshaft and bearings and it's been fine for over 600 miles. We never did find the cause of the original failure.

I just repaired an engine that someone had re built with heaps of silicone sealant, so much that it extruded into the engine and was picked up in the oil and blocked the strainer, this engine was basically destroyed due to lack of oil pressure a direct resault of improper use of silicon sealant.

I wouldn't want to be stuck in the middle either. Perhaps you could mediate a compromise. Offer to pay for the parts if the rebuilder will cover the labor and shipping. That will give them an "out" without admitting fault, and will let them at least give the appearance of being concerned with customer satisfaction.

Part of the labor you pay a shop goes to cover work they have to do over again but can't charge you for. That includes replacing defective new parts, parts damaged by the mechanic, and work done improperly the first time. You can expect to pay a second time for work you did yourself that led to a problem, but that doesn't apply in this case.

Ask the mechanic if he will install the replacement engine at no charge. Even half the normal charge might be an acceptable compromise. To be safe, request he not use any silicone sealer, at least at first. In the somewhat unlikely event a leak develops, let him handle that at a later time once the reliability of the new engine has been proven.