From the State Department website: "The chip in the passport is just one of the many security features of the passport. If the chip fails, the passport remains a valid travel document until its expiration date. You will continue to be processed by the port-of-entry officer as if you had a passport without a chip."
Upside is that the document is still valid until expiry. Downside is the additional wait time and potentially extra scrutiny.

This page talks a bit about the chip itself and that you'd have to state the failure of the chip to work to validate the "damaged" claim. https://www.us-passport-service-guid...placement.html