Yes it was a setting you could enable in the Arcade Mode disk IIRC but the option was not present on the Simulation disk. The code is possibly buried in there on that disk though.@Grayfox GT2 actually featured damage in the form the op described. Hitting walls and card would misalign your wheels and destroy steering basically. It's usable in arcade mode only by default.
I don't know if it can be forced on in sim mode, nor if it can be enabled through event settings. Depends how this thing was programmed.