You are 100% correct. THEY should have known to srt the piston dome clearance or "squish".
That is absolutely part of the installation.
Your connecting rod is NOT too long. Their kit/cylinder is too short. There is no way in Hell you are libel for the cost on repairing it. As a matter of FACT, they should also replace your wrist pin bearings due to them getting slammed into the con rod race.
If this were my bike I would be insisting THEY replace the entire crankshaft/bearings. If you have any failure down the road it is 100% due to a quick/shoddy install.
That being said, They know all this, and will sh** their pants if you bring it up. Their first response will be... "Their is no warranty on performance parts." BUT Their is a warranty on damages caused by a less than adept mechanic in a state registered repair shop. Under their DMV sales/repair certificate they are responsible for damages.
Complaints that are not addressed can result in them loosing their repair Cert. Hit them w/ this, and see " who's rod is too long.
The reason it melted over the rings is they had the compression too high, and it was pre detonating creating heat. The jetting also has to be addressed. Go up at least 2 steps, and perhaps 5 steps on the main jet.
Show them this post if it is easier for you. Z
Ps... My grammar, and my attitude suck, but I have been working on engines for a living for 40 years. Yours is not the first time this has happened