These are the conditions from the 737 QRH for Severe Damage.
Condition: One or more of these occur:
•Engine fire warning
•Airframe vibrations with abnormal engine indications
•Engine separation.
You had abnormal engine indications but if this was not accompanied by airframe vibrations then it doesn’t meet the condition for Severe Damage. Practically I think this is only possible in a simulator. In the aircraft, the chances of both spools stopped with no airframe vibration is virtually impossible. A signal failure to both indicators may do this but then you may not lose thrust. So, in my opinion, your instructor is technically correct but it’s not a likely scenario for real. Sounds like that sim puts N1 and N2 to zero when Engine Flameout is selected.