The “Damage†checkbox that appears near the bottom of the main menu when you select Play > Free roaming affects the degree to which vessels will suffer damage in collisions.
The amount of control varies with vessel type and circumstance:
In a standard test that involves driving the vessel at high speed into the wall near the Maeslantkering,
Protector, for instance, will show some damage indicated on her icon but will not sink if the Damage box is unchecked.
Other vessels may not indicate damage.
If you are really interested, you can test each vessel in the fleet as described above to see how each responds, and observe the variety in ways they sink.
Ram the wall at a place where the depth is sufficient that she will not ground before hitting the wall. The way she sinks is determined by whether she hits bottom before going under.
We often see complaints that the boats won’t sink or don’t do it in a realistic manner. My observation is that those who seek to entertain themselves by the simple-minded pursuit of sinking ships tend to approach the problem in a simple-minded way.