Free hub bearings can wear out/collapse. Happened to a mate of mine’s Hope Pro2 Evo recently. Was very evident due to the play shown at the cassette. He stopped riding it and fixed it before damaging other parts.
The play you described and the secondary damage to the end cap suggest that yours was far worse and would have been obvious when riding (metal on metal contact, and deformation of metal tends not to be silent).
What you should have done is stopped riding it and fixed it rather than waiting for further damage to be caused.
The part that has failed is a bearing or pair of bearings. The free hub that you’ve ranted about twice is fine in spite of your lack of mechanical empathy.
BTW – a pair of bearings in there and ideally a new end cap and it’ll be good to go.
I’ve got a few pairs of DT 240 and 350 hubs and never had a bearing fail, so I think you’ve been unlucky (and shouty). 😉