Thank you everyone for your replies, comments and suggestions.
Lots of remarks about the insurance payout. Here is a little more back story. We purchased the boat at a DEAL from a good friend. My wife called the insurance company (Chubb) at the time of purchase in 2016 and was told they would not insure for any more than we paid, apparently this is a "stated value policy". Hence, we are now left with the insurance calling the boat a constructive total loss. Settlement is based upon the insured value of $11,000 minus the deductible of $500. Insurance has offered us to buy back the salvaged boat for $1000 which would leave us with a net settlement of $9500 if we take back the boat.
As far as the damage to the motor, the mechanic started the motor after reconnecting a new ignition and battery (the thieves stole those) and said there was a noticeable knocking noise when run. Cyclinder number 2 had no compression. They inspected with a camera and found scoring on the cylinder walls and the piston ring appeared damaged. Spark plug had been impacted by the piston. They want to remove the engine and replace the long block.
We had a couple of knowledgeable friends look at the photos provided with the estimate (one of which works as a boat mechanic) that concur with the Nautique dealer's findings.
So, we need to decide if we want to take the $9500 and use it towards the $16.5K quoted for a new ZO motor (and do the other repairs ourself...dash, ignition, prop damage, etc.) or we were quoted $8K for a used ZO motor with >1000hrs, or look for something else totally (with or without ZO). We are thinking either way we should likely buy back our "salvaged" boat for the $1K and either keep it or resell for maybe $4K for parts or to anyone else mechanically who might want to do a rebuild themselves.
Thanks,
Nate