Hey Loco...
This is good news but I still think it's something other than the terrain LOD variable...
I suppose it makes sense that it's really a lack of resources like memory but I have not seen this phenomenon and
my latest project is as big as 3dgs is going to be able to handle with more than a million and a half vertices total and that’s just the terrain.
There are over 200 pieces of terrain and I use the LOD variable set at 3.
But, it works set at any setting 1 thru 4.
So, I'm glad you found a work around but if you ever want, I'm still willing to have a look.