How do hydraulic flat tappet lifters fail?

The short answer is...... a lobe profile that’s designed to use up the entire area of the lifter has less room for any kind of misalignment or misplacement of the lifter bore in the block.

Depending on the particular block, this can be a big problem.

Quite a few years ago a group of people from Moparts got together and fielded an entry into one of the Enginemasters competitions(2001-2002 maybe??).
The rules that year mandated flat tappet cams.
We used fast rate .904 solid lifter lobe designs........ two of which promptly failed in short order on the dyno.

The motor was diassembled and the block brought to a shop for lifter bore correction(bushings).
The guy who performed the operation said several of the bores were .030+ out of position.
Since the lobe profiles were designed to come within .015-ish of the edge of the lifter, that situation was never going to work.
After the lifter bores were corrected...... no more cam failures.

So, by using a lobe designed to work with a smaller diameter lifter, there is a bigger margin for error with regards to lifter bore placement before the edge of the lifter is digging into the flank of the cam lobe.

Yes, there is a potential to make more power with a lobe profile designed to utilize the full diameter of the lifter....... but it has to live first.

At this stage of the game....... would you trade say...... 10hp to have been able to avoid what you’re going through now?

I have no idea if that’s what caused your failure or not, but moving forward I’d try and stack the deck in your favor if I were you........ and not using a fast rate .904 is one more item that can be applied towards that end.
Thanks a lot for the education. I think one of the most important lessons I’ve had to learn is that bigger is not always better when it comes to building an engine. Even with as mild a build as mine is, it might behoove me to tone down at least the cam to what you’ve suggested.