As a complete outsider with no view other than what I have read in the reports it strikes me that yes an error occurred on the part of the inspector as far as the inspection was concerned. I have a deep sympathy for his position and understand that this type of stress would be enough to tip any normal person over the edge. Calling the 'madness card' to my mind is crass and shows a lack of understanding on the part of those making the accusation.
But back to the subject as a third party reading the AIB material it strikes me that the modification and the subsequent inspection still exceed the original certification tolerances so it comes to my mind what exactly was the pilot doing with the aircraft to exceed the design tolerances to such a degree to cause the aircraft to fail in flight? Showboating to the passenger? Was the passenger given control and the aircraft end up in a situation where this relatively low hours instructor could not recover?
As an outsider I have more questions than answers. Which I guess if I was called to jury service would be the questions I would ask.