The certification team talked about it, then looked at the checklist which asks them to "Verify that no major damage is present. Minor impact damage or 'zipper' is acceptable." In the end, it is their judgement. They deemed the damage to not be major, but rather minor impact damage, and awarded me my Level 2.
This makes sense to me, because the criterion is about damage, not about the descent rate under parachute. This rocket's descent rate was just fine on two previous flights. Another rocket with stout 1/4" thick plywood fins could likely have withstood the same impact on the hard dirt, but then could crack a fin landing in a gravel parking lot.
Whether damage is major or minor, to me, depends on the extent of repair effort required. Likelihood of damage is a function of the wind gusts and the landing surface as much as it is the size of the parachute. With a normally acceptable parachute, if you are unlucky and land on a paved road, or hit the side of a barn, or catch a gust, there will likely be some damage.
The builder can mitigate the level of damage by building hell for stout, or by making it damage tolerant. But a stout fin can still get busted up, if you are unlucky. Then some major surgery is required. If you can replace some nylon bolts, or worst case put in a spare fin, the extent of repair time and effort is much reduced and the damage is minor.