Job,
I've downloaded both your Terrain and the Pinhead Avatar - very nicely done by the way - and done a few tests.
First the cloth tearing:
Pinhead:

Christian:

Mason:

The tearing is only visible on the CC clothing.
Something else that I noticed during testing is that if a CC avatar is added to your Terrain by double clicking, and not drag & drop, the pose is totally weird,
Mason:

Christian:

Pinhead:

This doesn't happen if I use one of the default iClone Terrains, they all stand on the Terrain in their correct default poses.
Also, it doesn't matter if I add your Terrain, or an iClone default Terrain to a blank Project - the Physics setting message pops up in all cases.
Gerry
System: Win 10 Pro (21H2), Asus X99-E WS, CPU i7-5930K -3,5 GHz, 32 GB DDR4 2666-16 RAM, NVidia GTX 1080 Ti GPU - 11 GB VRAM(Driver Studio-536.99), Samsung 850 Pro 512 GB SSD, 6 TB HD storage.