Sounds like you had pressurized gases during the burn get past the delay grain. I lost a rocket and two forward closures like this, but I consider that a CATO, because the delay grains don't burn with enough flame and pressure to burn up a rocket.
You did have the delay grain in place? Epoxying a penny in place sounds like trying to plug the closure so it can hold chamber pressure. IMHO that would be way overkill for just stopping a little flame from a delay grain. As other have said, a little dog barf and tape is more then enough.
Yes, the failure mechanism of concern is flame coming out of the top of the ejection well while the motor is under pressure. It's actually happened to me twice. One is in the picture. I recall this was a Smoky Sam motor. The other was the sustainer in a two stager, and in that case, it might have been due to a long-burn motor with the delay being not that much longer than the motor burn. It burned through the top long enough to char the tube above the motor but not long enough to cause real damage. And yes, the purpose of the penny and then potting the charge well above it with epoxy is to prevent a rocket-destroying burn through. I figure any failure mechanism that has happened twice is worth stopping. So, if I am not using the ejection charge, the charge well gets filled. I'll bet I've spent a buck on this by now. Actually, it was my impression that quite a few people do this, but perhaps not.
And as long as we're on the subject of CTI 54mm motors, the other thing I do is glue the forward closure to the top of the liner (and on the bottom, too, if it is not already glued). I have seen on the order of a dozen failures where gas gets by the seal and either causes the motor tube to bulge just below the forward closure or causes a burn through. A few pics of that failure mechanism are attached as well (I have an assortment of those, including (somewhere) a picture of flame coming out the side of the rocket).
You don't have to do these things if you don't want to because most of the time the motor will work as designed. Most of the time....