Interesting find.
I was notified of this thread so I came here. In case it helps, let me add what that flag might be doing.
It is just a guess really, but, if the flag does what its name suggests (which might be or not be the case, plus, the name could be wrong or outdated) then a likely interpretation is as follows:
Flag set = "Dear game, please activate this optimization for all meshes using this material:
when they are seen from afar, and you would normally use lod (say) 3, then do use it, but, when there's many of them, don't draw them one by one: instead, combine them automatically in a single unified bigger mesh and draw that mesh once instead, in place of all the tiny ones."
(the results is that the the same set of triangles are drawn, but as a single "draw call", not many. Reducing the number of "draw calls" can save a lot of time and so it is a good thing. But, it also imposes limitations: you now have to draw all the objects or none; for example you cannot skip the ones which happens to be offscreen anymore; plus, the objects cannot move any longer with respect to each other.)
Here is a scenario where this kind of optimization is almost a necessity: say you have a mesh for some vegetation. At LOD0, it is fairly detailed, but at LOD4 it is maybe just a few polygons, maybe as few as one or two. Does this mean that you can afford to have like hundreds of them, or even thousands, far away in the background? Well, drawing a few thousands triangles is certainly not a problem, but making thousands calls (each wasted to draw a few triangles) is. Most of the GPU time is lost in overheads. To fix this, that flag (from what I can be inferred by its name) would create a single mesh featuring a few thousands one-or-two-polygon plants, for the entire vegetation of the current scene.
The unification process is done by the game and many things might go wrong with it, hence the crashes (maybe). Maybe that flag is not supposed to be used in conjunction with something else, eg. maybe it shouldn't be used with skinned mesh, or who knows. It certainly cannot be used with meshes that are supposed to be moved independently from each other inside the scene.