Pinion Gear Chipped - is it ok to run?

Actually that's a 4-planet trac-loc and with no differential power across the unit, the cross-pins can sit; not against the ramps.With the wheels stopped and power inputted, the side gears will force the pins against the ramps and the ramps in turn will clamp the clutchpac, turning the whole unit to somewhere between a weak SureGrip and a spool, depending on how it's set up, and the condition of the clutches.
Nevertheless, the backlash sounds waaaay excessive, as already said.